The mutual funds, called ''subaccounts,'' resemble the choices you'd get from a fund family, ranging from stock indexes to money funds. But your earnings aren't taxed immediately, so they grow faster. You pay for that break in three ways. That can double the tax on stock gains. Then there are the fees.
Insurers pay less for funds because they buy in bulk.
But between fees and the lost capital-gains tax break, most variable annuities may need 15 years to match the aftertax performance of a taxable account. Insurers' fat fees created an opening for mutual fund giants. But annuity pricing will get a jolt in October, when TIAA-CREF, the big pension fund for academics, rolls out its new Personal Annuity Select nationwide. The annuity at first will offer just one subaccount, a stock index fund. We're selling annuities as a simple product with low costs,'' says Chairman John H. Biggs.