They're paying an extra 1 percent to 1.5 percent a year for the annuity. I want them to know you don't have to do that. A 457 does the same for government workers. A tax-deferred annuity is an investment sold by insurance companies and combining insurance and an underlying investment. Fixed annuities are similar to certificates of deposit, paying a fixed rate.
Variable annuities invest in bond and stock mutual funds.
The investor pays annual management fees for the investment, plus 1 percent to 1.5 percent for the insurance. Annuities also lock an investor into the account for years by charging early-surrender fees of up to 7 percent. The 457 plans, established in the late 1970s, have always allowed mutual funds. The problem is that few employees know this. The insurance companies that sell annuities have no reason to clue them in.