Dreyfus offering annuity with money-market angle

Is there a pot of gold at the end of the rainbow? According to the Dreyfus Corporation, there is. Dreyfus, one of the nation's largest mutual funds, in conjunction with Beneficial National Life Insurance, has begun offering investors a variable annuity called the Dreyfus Rainbow.

The Rainbow will allow investors to take advantage of the higher rates sometimes paid by money-market mutual funds, while at the same time deferring taxes on the interest. Dreyfus hopes eventually to allow investors to make annuity investments in many of the 10 mutual funds it owns as part of the Rainbow plan.

Dreyfus's new plan joins a growing list of funds offering money-market funds wrapped around a variable annuity. In Pittsburgh, Federated Securities sells a plan called Federated Flexible Plan, while Putnam in Boston is marketing a similar plan called Galaxy. Merrill Lynch & Co. is selling its Spectrum fund, while another broker, Oppenheimer, is retailing its own version, called Variable Annuity Contracts.

The Dreyfus fund differs from the others in that the no-load mutual fund had decided to market the plan itself -- not through a broker or insurance company. The others are either sold through brokers or insurance plans. As part of its marketing plan, Dreyfus has placed a series of ads in the New York Times and the Wall Street Journal.

There are several aspects to the Rainbow and other plans that make them appealing: First, investors receive variable interest rates. Thus, when rates soar to 20 percent and more as they did earlier this year, investors can cash in on them on a tax-deferred basis. Second, some withdrawals are allowed. During the accumulation years, Dreyfus says, occasional withdrawals are free of surrender charges and are tax-free until they exceed the total amount of money paid in. And third, like many other annuities, there are various payout plans.

Initially, Dreyfus has decided to aim its sales pitch at the shareholders in the Dreyfus Liquid Assets Fund, its clone fund, and the A Bonds Plus fund, which altogether had assets, as of July 11, of $4.1 billion. The fund, however, will not be just aimed at these investors; eventually it will be sold to new customers.

The mutual funds could eventually begin to compete with the insurance companies in offering individuals annuities. Insurance annuities sometimes offer extremely low yields and carry relatively high fees. The Dreyfus, Federated, Putnam, and Merrill Lynch funds, for example, charge no sales fee. However, they do tack on annual management fees ranging from $25 and 0.95 percent of the assets to $30 and 1.4 percent of the assets. Minimum investments range from $1,000 for the Federated fund to $3,000 for the Putnam fund.

Dreyfus will offer its fund initially on a state-by-state basis. It has to do this since the annuity is an insurance product and must be approved by each state insurance commission. The mutual fund also points out that the annuity can be purchased in conjunction with an IRA or Keogh retirement plan.

Although the mutual fund industry cannot guarantee returns, Dreyfus points out that daily yields on the Liquid Assets fund averaged 10.37 percent in 1979 and 13.95 percent for the first five months of 1980. Since then, however, money-market yields have fallen to the 7-to-8-percent range. Normally, Dreyfus says, the yields should keep pace with inflation.