The Best Variable Annuities

Sales of variable annuities in 2008 were down 15.1% from their peak in 2007, according to the Association for Insured Retirement Solutions, a variable annuity trade association. Total sales declined to $154.8 billion from $182.2 billion the year earlier.

Despite the decline—most pronounced with the year-over-year fourth quarter decrease in sales of 30.3%—clearly millions of investors still consider variable annuities an important part of retirement planning.

The biggest drawback to variable annuities is the additional costs associated with them as compared to straight mutual fund investing. The biggest benefit to them is the guaranteed withdrawal benefits which have proved their worth during this ongoing market decline.

As part of the annual update of TheStreet.com Ratings’ Consumer Guide to Variable Annuities, we reviewed more than 1,300 annuities listed in the Morningstar Principia Variable Annuities Advanced product to find those meeting specific criteria: no front-end load, no surrender charges, an insurance company with TheStreet.com Financial Strength Rating of B- or higher, a wide selection of mutual fund choices, above-average returns, and below-average internal expenses.

A partial list of the ten variable annuities published in the Consumer Guide with the best combination of these features are listed below. Needless to say, finding above-average returns in 2008 results presented a challenge. So rather than above-average returns, we settled for contracts that lost less than the overall market. For example, the “Retirement & Supplemental Retirement Annuity” offered by Teachers Insurance & Annuity Association had a one-year total return of negative 21.66% compared to a decline in the S&P 500 of 37% in 2008. “Signature Immediate VA I” offered by John Hancock Variable Life Insurance, a unit of Manulife Financial Corp. (Stock Quote: MFC), had a one-year total return of negative 25.01%.

It is important to remember that the criteria used to compile this list may not necessarily be one size fits all. These are broad criteria that are important to consider and help whittle down choices to a manageable list. These variable annuities are sold through independent financial advisors with whom investors should consult before making a decision.

We also recognized that the low-cost variable annuities typically don’t have guaranteed withdrawal benefits which can be so valuable. So criteria for surrender charges and internal expenses were relaxed since, in addition to a fee, the trade off for a guaranteed withdrawal benefit is a surrender charge that generally applies for five to ten years.

Again, a partial list of the ten variable annuities published in the Consumer Guide is included here.