First lets look at a worst case for mutual funds versus a typical variable annuity. Suppose also that both investments have the same pre-fees return, the 10.7 percent a year long term return of common stocks. The mutual fund has annual expenses of 1.43 percent, the average for domestic equity funds. This expense is subtracted from the return. The fund is unusual in that it realizes all gains every year.
Few people pay all their taxes at once.
Instead, they withdraw income over a long period of time. The monthly income from the annuity will be higher than the monthly income from the taxed mutual fund. A naked fund with somewhat smaller fees or a slower portfolio turnover rate, however, would better the variable product. They only work for the very longest term investors and at very high levels of annual returns and risks. Now lets test the same variable annuity against the new tax law.