MONEY SAVVY WEEKEND : Variable Annuity Firms Compete to Give Consumers a Better Deal : TIAA-CREF slashes fees as industry seeks to shed its reputation for high costs and high-pressure sales tactics.

The variable annuity industry, long under fire for high expenses and high- pressure sales tactics, is taking dramatic steps to win the respect and retirement investment assets of savvy consumers.

In the last week, three major industry players--TIAA-CREF, Fidelity Investments and John Hancock Life Insurance--have moved to reduce the cost of existing products, create new low-cost products or add attractive features.

The latest salvo: New York-based TIAA-CREF Life Insurance Co. on Thursday introduced a new variable annuity that boasts the lowest annual costs in the industry at slightly over one-third of one percentage point of assets. Compared with the average annuity fee of 1.6% to 2.1%, this fee could save investors tens of thousands of dollars over the long term, experts note.

“We recognize that the general public has a tremendous need for a low-cost annuity,” John Biggs, TIAA-CREF’s chairman and chief executive, said in announcing the new product. “We also know that annuities have been widely criticized for their high expenses and lack of liquidity. We believe that our newly designed product with rock-bottom expenses specifically addresses those criticisms.”

TIAA-CREF’s announcement comes days after Boston-based Fidelity Investments Life Insurance Co. said it would eliminate so-called surrender charges on all its annuity products--including the policies of the company’s 140,000 existing customers.

Surrender charges, levied on people who take their money out of an annuity within the first few years of the initial investment, have been a sore spot with consumers who don’t want to be penalized for moving their money around--particularly if they’re fleeing poor investment performances. Typically, surrender charges shave between 1% and 7% off the value of accounts transferred to another annuity provider or cashed out.

Meanwhile, Boston-based John Hancock last week added a handful of optional features--including long-term care insurance--to one of its annuity products, in an effort to make it more attractive to consumers who are worried about the high cost of nursing care.

“What you are seeing is a bifurcation within the annuity market,” said Patrick Reinkemeyer, editor and publisher of variable annuity/life products at research house Morningstar Inc. in Chicago. “On one end of the spectrum, you are seeing companies offering annuities at a very low price point. On the other, you see those who are trying to differentiate their product by souping up the insurance benefit, which can actually increase the cost but give you a bigger ‘rest-easy’ benefit.”

The reason for these moves is simple, experts say. With the aging of the massive baby boom generation, more people are interested in saving for retirement. That’s helped annuity sales grow at a steady 6% to 8% clip for the last several years. In 1998, $95.4 billion in annuities were sold.

Many experts believe the product would be far more popular if industry players addressed the main complaints, primarily the high costs that can sabotage long-term returns.

“What the industry, in general, has done is take an extremely effective tax-deferred investment vehicle and tarnished it by charging high fees that minimize or offset the advantage of tax-deferred growth,” said Dennis Foley, TIAA-CREF’s vice president of annuities and mutual funds. “We’re lowering those costs and pointing out that annuities are primarily designed for people who have contributed the maximum amount to a pension and IRA. We encourage the industry to follow our lead.”

Morningstar says the average annuity fee is double that of the average mutual fund. As an indication of how hard the vehicle is sold, it notes that in 1996, $21 billion in annuity investments went into individual retirement accounts--rendering the tax deferral redundant.

New York-based TIAA-CREF, the nation’s largest pension system, has been selling annuities to teachers for 80 years, and two years ago it began offering them and other products to the general public.

With this latest move, it has undercut even Vanguard Group, long known for its low fees, in the annuity market.

Variable annuities are a hybrid product geared to high-income people who want to save prodigiously for retirement.

In essence, they allow consumers to invest an unlimited amount of after-tax dollars into an account that works a bit like a 401(k)--you’re given numerous investment options and able to transfer your assets between accounts without adverse tax consequences. Unlike a 401(k), however, you get no tax deduction for putting the money into a tax-deferred annuity--although your assets accumulate on a tax-deferred basis until you pull the money out. At that point, you’re taxed on the investment earnings at your ordinary income tax rate.

The reason these accounts are tax-deferred is that they contain a life insurance component, for which investors pay a “mortality” fee. This benefit basically ensures that if you die during a market downturn, your heirs will receive the greater of your account value (principal plus investment earnings) or the total amount you invested.

The chance of needing to collect on that insurance promise is slim, particularly for long-term annuity investors who can ride out market swings. Indeed, Morningstar’s Reinkemeyer says this promise has more psychological than economic value.

Today, more companies--including Hancock, with its long-term care benefit--are expanding that insurance component, so you can benefit from the insurance while you’re alive. In Hancock’s case, you can buy a long-term-care insurance rider with your annuity that will pay you an additional monthly amount if you end up needing long-term nursing care.

Still, with any long-term investment, the more you pay in annual fees--including mortality fees--the less you walk away with at the end of the day. Variable annuities are designed to be very long-term investments--typically, you’d contribute for five to 20 years, then withdraw your money over the remainder of your life. Since higher-cost annuities often charge more than 2% annually, these fees can add up to a fortune over time.

As an example, TIAA-CREF estimates that if you invested $10,000 in a traditional variable annuity that charges total annual expenses of about 1.6%, you would end up with $83,749 in total value at the end of 30 years. However, if you invested the same amount in TIAA-CREF’s annuity, which charges 0.37% in annual expenses, your withdrawal value would be more than $116,000.

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Annuities: A Closer Look

Who Should Consider Them?

Tax-deferred annuities do not make sense for everyone. That’s mainly because they have all the drawbacks of qualified retirement accounts--such as taxes and penalties if you withdraw your money early--but don’t offer any upfront or back-end tax breaks such as those offered by IRAs or 401(k)s. What variable annuities offer, however, is tax-deferred growth between the time you invest and the time you take the money out. In the right circumstances, that can be valuable.

Who can benefit from them? Those who:

* Have already maximized their contributions to IRAs (Roth and traditional), 401(k) and Keogh accounts, but continue to want more money saved for their retirement years.

* Have plenty of money to address current and mid-range goals, so are certain they will not need the annuity money before retirement.

* Are nervous about whether market gyrations might reduce the value of their estate for their heirs. The insurance component on most annuities ensures that your heirs will get the greater of your accumulated account value--your investments plus interest--or the amount you invested. The insurance component generally does not kick in unless you die before withdrawing your money.

Comparing Retirement Options

Trying to compare your retirement savings options? Here’s a look at features of the four common choices--the Roth IRA, the traditional IRA, the 401(k) and the variable annuity.

Issues to consider: Are contributions tax-deductible?

Roth IRA: No

Traditional (deductible) IRA: Yes

401(K): Yes

Variable Annuity: No

*

Issues to consider: Is investment accumulation tax-deferred until the money is pulled out?

Roth IRA: Yes

Traditional (deductible) IRA: Yes

401(K): Yes

Variable Annuity: Yes

*

Issues to consider: Tax rate at withdrawal

Roth IRA: 0

Traditional (deductible) IRA: Entire withdrawal taxed at your ordinary rate

401(K): Entire withdrawal taxed at your ordinary rate

Variable Annuity: Withdrawals--excluding principal--taxed at your ordinary rate

*

Issues to consider: Maximum annual contribution

Roth IRA: $2,000

Traditional (deductible) IRA: $2,000

401(K): $10,000

Variable Annuity: Unlimited

*

Issues to consider: Income annual contribution

Roth IRA: Yes

Traditional (deductible) IRA: Yes

401(K): No

Variable Annuity: No

Note: The maximum amount you can contribute to a 401(k) is adjusted annually. However, some highly paid employees can be restricted from making maximum contributions under certain circumstances.

The Lowest Fees

Looking for a low-cost annuity? Here’s a list of the 11 that charge the smallest amounts for insurance and expenses and don’t impose surrender fees--a back-end charge on those who withdraw their money within the first few years. Most of these companies add a second expense for the management of the investment choice you choose. For instance, if you buy the Vanguard annuity and choose a basic equity index fund as the investment inside the annuity, you would pay 0.38% in insurance charges, plus about 0.20% in fund management fees, for a total of 0.58% annually. The one exception is the TIAA-CREF Personal Annuity, which includes both the insurance charges and the management fee, listing only a total cost.

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Number of Minimum Insurance investment initial Annuity expense* choices purchase TIAA-CREF Personal Annuity 0.37%** 2 $250 Vanguard Variable Annuity Plan 0.38 13 5,000 Waterhouse Variable Annuity 0.45 27 5,000 T. Rowe Price No-Load 0.55 7 10,000 Variable Annuity Janus Retirement Advantage 0.65 8 2,500 Scudder Horizon Plan 0.70 7 2,500 USAA Life Variable Annuity 0.75 12 1,000 Ameritas No-Load 0.75 10 2,000 Variable Annuity Fidelity Retirement Reserves 0.80 28 2,500 Schwab Distinct Assets 0.85 12 5,000 Schwab Select Annuity 0.85 36 5,000

*--*

*Annual expense, as a percentage of money invested.

**Total cost, including insurance expense and investment management.

Sources: Morningstar, TIAA-CREF