A new, insured savings account was announced last week for banks and savings and loan associations. It takes effect Dec. 14, and will be a good buy for many savers.
If you have at least $2,500 in a passbook account earning 5 1/4 to 5 1/2 percent, you should consider transferring it to the new, higher-interest account.
If you have been investing in uninsured retail repurchase agreements sold by banks and S&Ls, you will find these new accounts a better buy. Repurchase agreements are advertised as "backed" by U.S. government securities, but they are not necessarily covered in full. In some cases, the securities supposedly backing the repo may not actually be there. The customers of a failed bank in Mount Pleasant, Iowa, have had to go to court to try to get their money back from retail repos.
If you have been keeping your savings in a money-market mutual fund, and are happy with it, you will probably want to stay there. Over the long run, money funds will probably pay you a higher effective yield on your ready savings than you will get from these new bank accounts. But if you have never been quite happy or comfortable with a money fund, or want an insured investment, you might want to consider switching your savings back to your bank or S&L.
My only complaint about the new account is its name: the "money-market deposit account." This deliberately blurs the distinction between money-market accounts (offered by banks and S&Ls) and the tremendously successful money-market mutual funds (offered by investment institutions). Banks and S&Ls like the "money-market" name and have borrowed it before, in hopes of attracting savers away from the mutual funds. But it leaves the average saver confused.
When you invest in a money-market fund, you are buying a share in a portfolio of short-term securities. Some funds buy only U.S. government securities; many also buy bank certificates of deposit and similar instruments. Most funds require a minimum investment of $1,000, and charge a management fee of one-half of 1 percent. Your net yield reflects exactly the yield on the fund's entire portfolio of securities, because you own a share in those investments. Recently, money funds have been paying an average of 8.6 percent.
You can write checks on your money-fund investment. Some funds accept checks only in denominations of $500 or more; a few put the minimum at $250 or less.
When you open a money-market deposit account, on the other hand, you are getting a government-insured bank or S&L account. Your minimum deposit is $2,500, and the institution can pay whatever interest rate it wants. Some may link their rates to an independent index of market rates. But most will maintain the flexibility to pay less if they want. You cannot be guaranteed a rate for longer than 30 days at a time.
"For the first three or four months, S&Ls will probably pay the same as money-market mutual funds," says James Kendall of the U.S. League of Savings Associations. "But after that they may start to pay less. These accounts are government insured, so they are probably worth more to savers than money funds." Institutions may also impose various fees on these accounts that can reduce your yield.
If your average deposit over any month falls below $2,500, you will earn no more than 5 1/2 percent, and perhaps less.
Unlike previous higher-interest bank and S&L accounts, the new money-market account offers the possibility of ready access to your money, without penalty. You may be able to withdraw money any time you like for your own account, either in person or by mail. Some institutions, however, may put limits on the number of withdrawals. Telephone transfers may also be restricted.
This new account is principally for savers, not for people seeking a better checking account. Depositors may make no more than six transfers a month to third parties, only three of which may be by check. Banks may impose their own minimums on the size check you can write.
Each institution will be offering its own special wrinkles to attract your money and attention. Ads in the newspaper will announce when the new money-market deposit account has come to town.