Q. A while back I read an article which showed that a 20-year-old individual could make eight $2,000 contributions to their IRA account (20 through 28 years) and end up with more money at age 65 than someone who contributes $2,000 from age 29 through 65. I showed it to my 19-year-old daughter and she was very intrigued with this idea. She wants to set a little money aside which could grow to age 65 in a tax-deferred manner. She is a college freshman and probably will have no earned income for the next four years, so an IRA is not a possibility.

I am considering either an annuity or a variable life policy. I received a prospectus from Ameritus for their no-load variable life and from Vanguard for their annuity. A careful reading of the Ameritus literature revealed some negatives to me— what appears to be a high expense burden. The Vanguard fees, on the other hand, are about 1% a year. The lower fee structure, to me, seems to offset the tax benefits of the variable life.

I would appreciate your thoughts on variable life versus annuities. I also read that you mentioned T. Rowe Price's annuity and I have requested a prospectus. What advantages do you feel T. Rowe Price has over Vanguard?


A. If you don't need life insurance, don't pay for it. That eliminates the life product since the life insurance cost would be a substantial expense drag, even for a young female. That doesnt mean the Ameritus product isnt a good choice for people who need life insurance it is a highly competitive entry and has the virtue of providing high cash value from year one. If you need cash value life insurance, this is an interesting product.

The Vanguard variable annuity contract is low cost and holds their low cost funds so it is an ideal vehicle for long term accumulation... and we are talking here about a minimum of 40 years if your daughter is to avoid the early withdrawal penalty. This has got to be very "deep" money.

( The argument for variable life, by the way, is that you can borrow against the cash value at any time without tax consequences or penalties. Some would argue that this benefit offsets the higher expense. Im not convinced.)

I mentioned T. Rowe Price because they offer one of the lowest cost contracts in the business and have a very nice selection of high performance rating funds with low management costs. No one, of course, can get in the ring with Vanguard when it comes to costs.

Q. I am paying 1.42% for a wrap account at a major brokerage house. I know you generally do not like wrap accounts, but is this a good price? My broker tells me this is a good deal . This includes international manager Brandes, Furman Selz, George Bjurman, etc. All of these are good managers, but are they worth the extra cost I am paying in this wrap account?

—JP, Dallas, TX

A. The answer depends some important details you didnt provide such as the size of the account and whether or not the 1.42 percent wrap fee is all inclusive. If it includes the management fees from the actual managers, a total cost burden of 1.42 percent is close to the cost of the average equity fund. That makes it very competitive unless you have a $1 million ( or more) account. Many of the newer, mutual fund wrap accounts cost 1.0 to 1.5 percent for the account, exclusive of the expenses of the underlying funds. Such arrangements can take the total cost burden to 2.5 percent or more.

The real issue in wrap accounts is the TOTAL cost burden for managing your money. The greater the burden, the greater the odds that the account will under-perform both its benchmark indices and competing funds that operate at lower costs. Wrap managers are not paid conditional on superior performance, they are paid regardless of performance. Wrap managers will argue that they provide superior service and information, that they take on the responsibility of "hiring and firing" actual managers, and that their constant examinations will put your money in the hands of proven superior managers.

I hear and respect that. The problem is that they could do all that and there is still a high probability that the additional cost will wipe out any benefit you would have over plunking your money into an all stock index fund or balanced index fund. I believe that some of these wrap managers can, and will, deliver. But the operative word is "some."

Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214)-977-8776; e-mail to scott@scottburns.com Check the website: "www.scottburns.com." Questions of general interest will be answered in future columns.