There are a number of important differences between mutual funds and annuities when they are offered under a retirement plan.
A mutual fund is a pool of securities, such as stocks and bonds, managed by an investment company.
An annuity is an insurance contract with one or more fixed-rate and variable investment options.
As for income options, annuities offer you the opportunity for lifetime income with or without guaranteed payments for a fixed time period*. Or you can decide to receive income for a certain number of years or take a cash withdrawal (depending on your plan’s provisions). Mutual funds offer systematic withdrawals. Otherwise, mutual funds and annuities are treated very similarly when offered as part of your employer’s retirement plan.
*Guarantees are subject to the claims-paying capability of the insurer. Payments from variable accounts will fluctuate based on investment performance.
Many participants enjoy the diversity of investing in mutual funds in their retirement plans.
The mutual funds chosen for your retirement savings plan provide the opportunity to focus on specific market segments - all of which offer varying degrees of risk and reward opportunities.
By owning a combination of funds with different investment characteristics, you may be able to offset the poor performance of one asset class with another that is benefiting from an upward trend. However, diversification doesn't guarantee against loss.
Mutual funds offer diversification, professional management, relatively low investment minimums and fees, and a range of choices among different asset classes.
Owning mutual funds can reduce risk through diversification and professional management, and allow you to potentially invest in a broad range of asset classes – U.S. and non-U.S. stocks, bonds, and real estate – with smaller amounts of assets.
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