Investment firms, financial planners and business journalists have been drumming a message into Americans' heads for years: your employer and the government probably will not sustain you through retirement; you must save and invest on your own.
The baby boom generation, which now sees retirement on the horizon, appears to have gotten the message. So much so that many have reached the limits of their tax-deferred IRAs and 401 (k) plans and have helped turn a hybrid insurance and investment product into one of the fastest-growing retirement vehicles around: the variable annuity.
Baltimore's T. Rowe Price Associates Inc., no stranger to the nation's investment Zeitgeist, has decided to join the party, now or so companies strong. It will offer its own low-cost variable annuity, starting next month.
"Where I think it will be ideal is for people . . . who are up to the limit on their 401(k) and/or IRA," said Joseph Healy, vice president for retirement planning at T. Rowe Price.
Price's product is called a "no-load" variable annuity, but investors will pay an annual fee. Still, it will be about 30 percent lower than most annuities sold by insurance companies.
The Price variable annuity will join a small group of similar "no-load" offerings, from the Vanguard and Scudder mutual fund companies, and soon from the Janus and Schwab investment houses.
Technically an insurance contract, the product will be offered jointly by Price and Security Benefit Life Insurance Co. of Topeka, Kan.
Sold by insurers, banks and investment firms, variable annuities allow people to sock money away each year in one of a number of vehicles, typically mutual funds. Because the buildup in value of insurance policies isn't taxed, the funds accrue tax-deferred until withdrawn, typically after the owner retires and the tax bracket has dropped.
The insurance benefit is a guarantee to pay the value of the retirement account either at death or when the payment period starts, whichever is sooner. Most annuities promise to pay at least the principle amount the customer invested over the years, even if the stock market wipes out the account entirely.
But the product is not for everyone. For one thing, customers must fund them with after-tax dollars, unlike a 401(k) plan. And like some other retirement plans, variable annuities carry a 10 percent penalty for withdrawing funds before age 59 1/2 . Further, most annuities levy a 7 percent or 8 percent surrender charge for taking money out too soon. The charge typically drops by 1 percent for each of the first seven or eight years after purchase.
T. Rowe Price's product carries no surrender charge. Its annual fees amount to .55 percent of assets for the insurance contract, and between .70 percent and 1.05 percent for the investment account, depending on which of five Price funds the customer selects.
Jennifer Strickland, editor of the Morningstar Variable Annuities/Life newsletter, hadn't seen all the details on Price's offering yet, but "from what I do know," she said, "it's definitely going to heat up some competition."
The market has been getting white hot lately. From annual sales of $4.5 billion in 1984, variable annuities shot up to $50.4 billion in 1994, according to the VARDS Report, an industry newsletter published by Financial Planning Resources Inc. of Roswell, Ga.
VARDS estimates annual sales will hit $78 billion by the year 2000, partly on the strength of competition from banks, whose ability to sell variable annuities was confirmed by the Supreme Court in January.
"I think it's a market that still has a lot of potential ahead of it," Ms. Strickland said. "It's for retirement, and people are always working toward retirement."
Those who dutifully set aside pre-tax income in their 401(k)s faced a 1994 limit of $9,235 (not including whatever amount the employer tosses in); and only $2,000 can be invested in an IRA each year.
But both products tend to carry low annual expenses. Annuities, by contrast, typically cost a good deal more: the average insurance charge for variable annuities is 1.24 percent, plus an average .74 percent charge for the mutual fund management.
Along with lower annual charges, T. Rowe Price "sounds like they're going to have some features that most of the other low-cost variable annuities won't," Ms. Strickland said.
For instance, there will be a fixed-rate account that acts like a one-year certificate of deposit. But there won't be an early withdrawal penalty for customers who withdraw an equal amount to switch into a mutual fund.
Also, Price will lock in the account's value every five years. So an investor who realizes, say, a 40 percent gain in the first five years will never receive less than that upon death or retirement, even if the market crashes before then.
So far, the Securities and Exchange Commission and 42 state insurance regulators, including Maryland's, have approved Price's annuity for sale starting sometime after April 4.