Press Room
Press Responses

April 24, 2001

Letters to the Editor
Morningstar, Inc.
225 W. Wacker Drive
Chicago, IL 60606

To the Editor:

We were surprised to learn recently that Morningstar, a major provider of data for the variable annuity industry, believes that there is a lack of investment options available to variable annuity investors-when most popular annuities offer a wide variety of funds. Surely the author of Morningstar's web site column, "Using Variable Annuities for the Accumulation Period," knows that many variable annuity contracts now offer 30 or more different investment portfolios. (According to Weisenberger, the average number of funds per contract in mid-2000 was 21.)

These portfolios are oftentimes managed by the most popular mutual fund managers-Fidelity, T. Rowe Price, Janus, and Franklin, just to name a few. Moreover, the clear trend in the industry is to employ a "multi-manager" approach, making two or more of these money managers available within the same variable annuity contract. Contrary to what your column claims, therefore, the variety of investment options and money managers offered by many variable annuities means that investors typically do not need to go outside their contract to change their investment when performance lags. Within a single contract, investors can react to a decline in one manager's performance by transferring money to other portfolios as often as they want without paying any taxes.

We were equally surprised to see Morningstar underestimate the effect of tax deferral. PricewaterhouseCoopers recently analyzed the after-tax returns of variable annuities and mutual funds using historical income and expense data (provided by Morningstar). The study pointed up a common misunderstanding-not all mutual fund distributions are taxed at long-term capital gains rates. In fact, across all mutual funds the Pricewaterhouse study found that over 40% of the total return was taxable at ordinary income rates. Taking this fact and other historical data into account, the study found that for the average investor and the average variable annuity and mutual fund, the after-tax payouts funded by variable annuity investments are substantially larger than for mutual fund investments for holding periods as short as 10 years.

Finally, let's set the record straight on variable annuity death benefits. At year-end 2000, only 3 percent of variable annuity assets were invested in money market funds; a significant majority-over 66 percent-were invested in equity funds. (Source: Info-One/VARDS.) Investors have allocated their money to the equity markets knowing their families are well protected in the case of early death. This protection is especially valuable during periods of market volatility.

NAVA shares with Morningstar a common goal of educating the public about variable annuities. In the future, we would be glad to provide you with information to help you achieve this goal.

Sincerely,

Mark J. Mackey
President and CEO
NAVA