When Karen Ferguson called National Permanent Federal Savings and Loan Association in Washington recently about increasing the interest rate on her Individual Retirement Account, she was told it would be impossible unless she were to close her current account, pay a penalty for premature withdrawal and establish a new account.
As April 15 approaches -- and with it the deadline for making contributions to 1978 retirement plans (unless an extension is granted) -- the question of yield becomes more important. Ferguson is not alone among IRA plan -- and, to a lesser extent, Keogh plan -- participants who are finding it hard to get maximem rates from banks and savings and loan associations.
According to the Federal Reserve's latest count, more than twice as many national banks are paying the highest interest rate permissible on regular time deposits as are palying the maximum on retiremement accounts. A random survey of eight financial institutions in the Washington area revealed that only three would agree to upgrade interest rates on existing IRA and Keogh accounts; an equal number permit these tax-deferred funds to be placed in even higher-yielding money market certificates.
Consumer activist Joe A. Mintz reports that there is a similarly checked pattern in Dallas, where interest rates on identical deposits to banks and S&Ls differ as much as 60 percent. Mintz, the author of "A Shopper's Guide to Individual Retirement Accounts and Keogh Plans," found the First National Band of Dallas offering "take-it-or-leave-it" 5 1/4 percent interest on IRAs while an S&A across the street was offering 8 percent.
Moreover, some of the institutions may be willing to grant higher interest rates on existing IRAs and Keoghs but they leave it up to the account holder to thke the initiative. S&Ls such as Suburban Federal in Annandale, which upgraded all its accounts automatically last June, appear to be the exception to the customary practice.
Jim Greshaw of FamilySavings and Loan Association in Springfield, which does upgrade IRAs, remarked that his institution does not advertise because of the confusion over the regulastion. When financial regullators created the money market certificate -- a $10,000-minimum, six-month deposit with the yield pegged to the discount rate on Treasury bills -- in June 1978, they also upped the interest ceiling on $1,000 certificates of deposit to 8 percent for eight years. Prior to that, the maximum rate was 7 3/4 percent for six-year CDs.
The regulatory agencies at first decreed that 8 percent could be paid only on new IRA and Keogh deprsits. However, when numerous insitutions complained about the complexity and the cost of making a quarter-point differentiation between existing and new money, the regulation was altered. In August, the Federal Home Loan Bank Board issued a clarification giving institutions the option of paying the extra interest on existing IRA and Keogh accounts with a maturity of three or more years.
This was intended to recognize that tax-deferred retirement accounts are usually long-term funds, regualrly augmented, so institutions could give IRA and Keohg plan participants a break not afforede to holders of fully taxable certiticates of deposit; i.e., upgrading existing accounts from 7 3/4 (or any lesser interest rate) to 8 percent and paying 8 percent on certificates of deposit with a minimum maturity of three years instead of eight.
But retirement accounts are also captive deposits in a sense. Individuals under age 59 1/2 cannot withdraw their funds permanently wkithout incurring a 10 percent tax penalty. The law allows Keogh participant to change investments at will, whereas an IRA participant personally may withdraw funds to make another investment only once a year without IRS penalty. Nevertheless, the holder still will be penalized by the financial institution in the form of loss of interest and reduction in rate if the deposit is withdrawn before its maturity date. In these circumstances, institutions naturally concentrate far more efforts on luring new depositors than on retaining old ones. For this reason, more than half the banks and S&Ls surveyed chose not to exercise the potion of upgrading retirement accounts.
Last April, the Fed found that 40 percent of the 9,400 national banks were paying the maximum 7 3/4 percent on six-year IRA and Keogh CDs. In July, after the 8 percent certificate was permitted, only 24 percent of the banks were paying 8 percent on IRA and Keogh CDs with a minimum maturity of three years. (In fairness to the banks, the instrumrnt was only one month old at the time of the survey and the percentage of higher payouts undoubtedly has increased since.) At the same time, 90 to 95 percent of the banks were paying ceiling rates on other time deposits of three months to six years maturity.
A Fed official offered the explanation that numbers of retirement savers may have chosen maturities shorter than three year because they were planning to retire in less than three years or because they wanted to upgrade their accounts more often. (A shorter maturity may be desirable during periods of rising interest rates, but Mintz warned that when rates decline, persons with retirement funds in CDs may suffer if they don't lock into the maximum rate for the maximum period soon, regardless of age.)
Whatever the reason, it seems clear that IRAand Keogh plan participants are not benefitting from maximum interest rates on their deposits. No upgtading from @cd/s, now paying 7 3/4 percent, to money market certificates, currently paying a maximum of 9.7 percent, is permitted for any account that has not matured. (Last week, the government lowered the rate thrift institutions can pay bu one-quarter percent). When asked if new tax-deferred funds could be put into money market certificates, provided the account contains the minimum $10,000, four of the eight institutions surveyed replied negatively, and a fifth replied it has not yet decided. All of the eitht sell the high-interest certificates to regular depositors. The following sell to retirement savers: Family Savings and Loan, National Bank of Washington and National Permanent.
The rationale in one bank official's words is that retirement savers must invest for more than six months. Yet, technically, a Keogh account can be changed whenever desired and a money market certificate rolled over after six months would meet the one year requirements for IRAs.
In the case where a retirement saver is locked into a relatively low-interest-bearing bank deposit, Mintz suggests one of two choeces. The first is to freeze the current account and put any future funds into an account -- or another type of investment entirely -- with a higher yield. The secound is to withdraw the funds and pay the attendant penalties, and tnen put them into a better investment that would compensate for the loss. This generally would only occur if the original account were quite young and the new investment were paying exceptional yields, such as the 12 percent or more now being paid on second mortgages.
In a related development, Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate subcommittee on private pension plans, introduced legislation last week that would allow individuals to claim a $1,500 tax deduction for contributions to a company pension plan. Currently only persons not covered by a company pension plan are permitted to set up an IRA and bank a maximum of $1,500 a year ($1,750 for a married couple) tax free. Benson said the bill was intended to "encourage greater savings and investment in our economy... and provide greater retirement security for employes... who do not remain with a company long enough to meet vesting requirements."