Money fund yields in variable annuities often less than zero

— -- Money funds aren't supposed to lose money, and they generally don't — unless they're an option in variable annuities.

Morningstar, the Chicago investment trackers, counts 1,639 money fund subaccounts in variable annuities, which are tax-deferred retirement vehicles. Of those, 1,615, or 99%, have produced negative returns the past 12 months.

(A subaccount is an investment option in variable annuities, much like a mutual fund.)

On many subaccounts, the losses have been piling up for years:

•98% have losses for three years.

•26% have losses for five years.

•12% have losses for 10 years.

For example, a money market subaccount in a variable annuity offered by SunAmerica — the Cash Management 3 subaccount — has lost 2.42% the past 12 months. It has lost an average 0.58% per year the past 10 years.

Small losses can add up over time. A 0.58% annual loss over 10 years would turn $10,000 into $9,435 — a 5.7% cumulative loss. Inflation has gained an average 2.5% a year the past decade, according to the Bureau of Labor Statistics.

Why money market subaccounts in variable annuities have performed so poorly: a combination of low yields and high fees.

The average money market fund yields 0.02% after management fees, according to iMoneyNet, which tracks the funds. Many funds yield zero.

But variable annuity subaccounts have other fees in addition to management fees. For example, variable annuities are tax-deferred retirement accounts, which include a small insurance benefit: If you die, your beneficiaries will get at least as much as you invested, minus any withdrawals.

The fee for that insurance and other expenses is included in the subaccount's overall expenses, and is in addition to any fees for managing the subaccount. Typical mortality and expense fees are 1.25%. according to the Securities and Exchange Commission.

Conservative variable annuity investors who would like an option that pays more — or at least produces positive returns — should consider a fund's fixed account. These CD-like investments are obligations of the insurance company, says Frank O'Connor, product manager for Morningstar, and tend to have a higher yield than do money market accounts.

Variable annuity assets were $1.6 trillion in June, according to the Insure Retirement Institute, a trade group.