PRICE WILL BE EVEN CHEAPER THAN VANGUARD’S: LOW-COST VARIABLE ANNUITIES READY TO DEBUT ON INTERNET

A small but fast-growing seller of insurance products in Louisville, Ky., intends to offer a new twist in e-commerce: cheap variable annuities sold on the Internet.

Ambitious ARM Financial Group Inc. will test the concept later this summer when it starts hawking a low-cost line of annuities, some of which will be priced under those of even penny-pinching Vanguard Group.

ARM, which already sells variable, indexed and fixed annuities and certificate of deposit-like investments through brokers, banks and independent commission-based planners, now plans to market its annuities to do-it-yourselfers, fee-based financial planners and bank trust departments under the name easy@nnuity.

Underlying investments will include eight Janus Capital Corp. stock funds and a money market fund, five bond funds and a utility fund from Federated Management Co. and three stock index funds from Bankers Trust Corp.

Total annual fees: among the industry’s lowest, ranging from 0.3% of assets for the BT Equity 500 Index fund, to 1.25% for Janus’ Equity Income and Growth and Income funds, according to public filings.

FEES well below average

That’s a major break from traditional variable annuities, which charge an average 2.15% in fees and expenses, according to Morningstar Inc. in Chicago.

Even factoring in a fixed annual administration charge of $66, a $20,000 investment in easy@nnuity’s BT Equity 500 Index fund would amount to $126 in total fees, vs. $144 for Vanguard’s comparable index offering.

Still, to take advantage of these rock-bottom fees, investors must be willing to fork over an initial investment of at least $10,000 and conduct all their business via the company’s website (www.easyannuity.com) which won’t open until ARM receives Securities and Exchange Commission approval, probably in mid- to late summer.

Simplified prospectuses, transaction and account statements and any other correspondence will only be available electronically. Investors can pay for their purchases via check or electronic fund transfer from a bank account. ARM won’t even staff a telephone call center. The annuity’s death benefit is underwritten by ARM affiliate Integrity Life Insurance Co.

“We believe that our Internet-based strategy will allow us to become a dominant player among self-directed investors and fee-based financial advisers,” says David Ferguson, pres-ident of ARM’s advisory group.

The company estimates it has spent just $150,000 for internal market studies and computer system changes to begin selling annuities over the web. It also will spend some $2 million to $5 million this year marketing the annuity in website banner and magazine ads, as well as cable TV and National Public Radio spots.

By eliminating back-office costs and marketing gimmicks like teaser interest rates for dollar-cost averaging programs, ARM figures it has cut so-called mortality and expense risk fees to well under 0.1%.

Typical broker-sold annuities charge 1% or more annually for a thin veneer of life insurance that affords the investment its tax-deferred status and guarantees that at death, the value of an account will be at least as great as the money originally invested.

Though direct sales accounted for just 11% of last year’s $100 billion in variable annuity business, Vanguard’s low-cost annuity assets now exceed $5 billion. “People have gotten to look at the Vanguard model and they clearly are doing it correctly,” says Mr. Ferguson. “We are taking it a step further with the Internet.”

So far, though, few investors have shown interest in buying annuities over the Internet as opposed to either calling the company or buying such contracts through the mail.

An earlier effort by Philadelphia-based Lincoln National Corp. and AnnuityNet Inc. in Leesburg, Va., hasn’t proved anything yet. Since its debut last September, Lincoln’s eAnnuity has attracted an estimated $5 million to $6 million in sales, according to an industry source. Shane Chalke, president of AnnuityNet, declined to comment on the estimates.

One possible reason for Lincoln’s poor initial sales may be price. A $20,000 investment in Lincoln’s BT Equity 500 Index and Janus Worldwide Growth fund options would rack up annual fees of $170 and $254, respectively, vs. $126 and $169, respectively, for the same underlying funds in ARM’s Internet annuity.

“They (ARM) seem to be capitalizing on a far larger savings in distribution costs than eAnnuity,” says Morningstar analyst Patrick Reinkemeyer. Mr. Chalke emphasizes that the Lincoln annuity is “still predominately an experimentation tool.”

AnnuityNet aims to add six to eight new annuity lines sponsored by well known no-load mutual fund companies and banks. “We don’t have expectations until we offer consumer choice,” he says. “Right now there is no choice and that is the antithesis of Internet culture.”

A big issue for ARM, Lincoln and other insurers is how to sell low-cost annuities online without antagonizing their commission-based sales force.

“We don’t believe there will be an adverse reaction,” says KevinHoward, an ARM senior vice president. “I don’t think our traditional brokerage line would see these self-directed investors or fee-based planning investors anyway.”

Analysts and others agree that the Internet holds promise for annuity and other financial services sales — particularly if the offerings are simplified. “Internet-based annuities can provide a great deal of education during the point of sale,” says Mr. Reinkemeyer. “The more you educate investors, the more comfortable they will feel toward buying an annuity.”