Exchange traded funds (ETFs) have become so popular that 401(k) plan providers and variable annuities want to include them. Variable annuities are contracts sold by an insurance company designed to provide payments to the holders at specified intervals, usually after retirement. Net assets of variable annuities grew to $1.5 trillion in the second quarter, according to the Association for Insured Retirement Solutions. So combining the two popular products should bring lower fees and more transparency than a mutual-fund based variable annuity.

However, for many advisers who use ETFs, they claim variable annuities have relatively high fees and lack flexibility, even if they are ETF based. Then there’s tax issues as well. An ordinary mutual fund or a normal ETF will have returns taxed as capital gains at a 15% rate, but withdrawals from a variable annuity can be taxed up to 35%, reports Darla Mercado for Investment News. This could offset any of the variable annuity’s tax-deferral benefits.

Tags: 401(k), Retirement