Q. You frequently mention that it is important to (1) diversify, (2) avoid "fat clogged" distribution systems and (3) invest in low-cost index funds. You also frequently mention funds such as the Vanguard Balanced Index fund shares [VBINX] or the Schwab U.S. Broad Market fund (ticker: SCHB) and Schwab U.S. Tips fund (ticker: SCHP).

Our IRA, however, is with Fidelity. They charge a transaction fee if we purchase a non-Fidelity Fund. Although it's not a significant amount of money, it is an additional cost. Could you suggest some Fidelity funds similar to the above in future articles? (We rolled over our 401(k) to an IRA with Fidelity because they have a local presence and I can always meet with a live representative.)  —F.B., Oradell, NJ
A. Fidelity is a managed-funds shop and has only a few index funds of its own. They are called Spartan funds. They have competitive, but not rock-bottom low costs. Fidelity Spartan Total Market Index (Ticker: FSTMX; expense ratio 0.10 percent) is the equivalent of the Vanguard Total Market exchange traded fund (Ticker: VTI; expense ratio 0.05 percent) and the Vanguard Total Stock Market Index 1 mutual fund (Ticker: VITSX; expense ratio 0.04 percent).

Fidelity Spartan Inflation-Protected Bond Index I fund (Ticker: FIPBX; expense ratio 0.07 percent); and Fidelity Spartan International Index (Ticker: FSIIX; expense ratio 0.11 percent). These three funds will allow you to build a basic two fund Couch Potato portfolio or the 3-fund Couch Potato Margarita portfolio.

Fidelity also offers 65 iShares ETF funds on a no commission basis, so you can build even more diversified portfolios at competitively low-cost at Fidelity. When expense ratios get as low as 0.04 percent or 0.10 percent, other issues like index tracking error are more important— but another whole topic.

Since Schwab introduced commission free trading of its own ETFs, every major firm has introduced competitive offers. So while Wall Street continues to develop complicated and expensive ideas for its enrichment, it is also possible for investors to build and manage their portfolio at true bargain cost levels.

Q. In many columns you have provided a variety of reasons for investors to be cautious about variable annuities. That doesn’t seem to stop the financial planners of today from pushing variable annuities hard. Do variable annuities now have something I should be considering for my future? I am 70. I am fearful, since they are insurance company products, that the insurance company and the advisers are making a whole lot more money than I ever would. Is this still true?—D.M., by email

A. The variable annuities sold to most people still have the same problem, expenses, that they had 6 or 8 years ago. But the problem has been augmented with new riders that make the contracts even more expensive.

While most conventional contracts had total costs of about two percent a year 10 years ago, I'm now getting mail from people who have purchased contracts with an all-in cost over 3 percent a year. Venders have also muddied the waters greatly with equity index annuities. In these products much of the expense is hidden because it is built into the product structure.

There are, however, many kinds of annuities. Some of them can be quite beneficial to people. Here's a list:

  • Annuity contracts that are structured like bank certificates of deposit now offer higher yields than C.D.s or comparable maturity Treasury obligations.
  • Life annuity contracts in which you exchange your principal for a right to lifetime monthly payments are good for retirees because a life annuity will increase spendable income and reduce the pressure to find yield on other investments. Multiple academic studies have found life annuities to be a powerful tool for avoiding going broke.
  • Low cost variable annuities. You won't find these offered by a commissioned sales force, but both Vanguard and TIAA-CREF offer variable annuity contracts with two major cost advantages. First, a low-cost insurance wrapper. Second, low-cost investment options such as index funds. The combination often works to reduce expenses by about 2/3s without losing the benefit of tax deferral on investment income and gains.

Those who already own expensive variable annuities can move to a low-cost alternative by doing what's called a 1035 exchange without incurring any tax expense.

You can read columns on annuities on my website at this link: http://assetbuilder.com/category/scott_burns/variable_annuity_watch