Expect lower income with less risky Retirement CD


NEW YORK -- There's a new retirement-savings product on the market, available from a few small banks. Called the Retirement CD, it's pitched at investors who put safety ahead of growth. But some unanswered questions swirl around the Retirement CD, and the bigger banks aren't offering it yet. Potential buyers might want to wait and see how this game plays out.

The Retirement CD, also known as an annuity CD, combines a bank deposit with an annuity. Like a CD, your principal and interest are fully insured by the Federal Deposit Insurance Corp. up to $100,000. Like an annuity, all your earnings are tax-deferred until withdrawn. At payout, you get a monthly income for life -- although potential buyers should note that the FDIC does not guarantee your lifetime payments. If the bank fails and is liquidated, you get back your principal and interest, minus whatever money you have already received. No further payments would be made.

Nevertheless, it's a safer annuity than the insurance companies offer because, when insurers fail, part of your savings can be lost. You pay for the safety of CDs by accepting a lower retirement income.

The insurance companies are screaming foul. They sell most of the annuities today, and think it will be hard to compete with annuities backed by deposit insurance. The industry brought a lawsuit, challenging the right of banks to sell annuities. But they lost the case in January, when the U.S. Supreme Court gave banks the green light to go ahead.

As a second line of defense, insurers are wielding their political clout against the Retirement CD. In the states, they're trying to get some insurance regulators to prohibit the CDs. Florida and Illinois have obligingly filed lawsuits. But a New Mexico lawsuit was thrown out after the Supreme Court decision.

In Washington, D.C., the insurers are moaning to Congress that the banks are engaged in unfair competition. Sen. Chris Dodd, D-Conn., will soon introduce a bill that would strip the Retirement CD of its valuable deposit insurance. Banks will be slow to offer the CD unless this threat goes away, says Washington attorney Ronald Glancz.

At present, you can buy a Retirement CD, by mail, from any one of 10 small banks: tiny Blackfeet National Bank in Browning, Mont. ($12.5 million in assets and located on the Blackfeet Indian reservation); the First National Bank of Santa Fe, N.M., ($212 million); and eight related banks in Pennsylvania. All 10 currently have top safety-and-soundness ratings from the rating service, Veribanc, in Wakefield, Mass., although Blackfeet had slipped in the ratings in 1993.

Of the larger banks on the list, the three safest, according to Veribanc's "blue-ribbon" ratings, are the Deposit Bank in Du Bois, Pa., Cenwest National Bank in Johnstown, Pa., and First National of Santa Fe.

The American Deposit Corp., in Pine, Colo., licenses the Retirement CD to banks and sets minimum standards for the product. You have to put up at least $5,000, says ADC executive vice president Dennis Gingold. Your money is invested in a certificate of deposit (depending on the bank, you get one-year, three-year or five-year terms). At the end of the term, you can reinvest at then-current interest rates.

The rates are lower than you'd get on the open market. That's your price for the tax deferral and the deposit insurance. But the banks can't pay you anything less than 3 percent. You face serious penalties for early withdrawal except in the case of death, disability or, at the Santa Fe bank, lengthy hospitalization.

At maturity, you must turn at least one-third of your savings into a lifetime income from the same bank -- so you shouldn't buy this CD unless you intend to keep it. You can't even switch banks without triggering taxes on the money.

Bottom line: There's no escape from a Retirement CD except at considerable cost. With an insurance company annuity, you can switch to a new insurer, tax free, if the new one pays a better rate. But with a bank, you're stuck. The banks know you're trapped, which may tempt them to pay low yields every time you renew your CD.

Even now, the bank's return is poor. Given a $51,000 accumulation, for a 65-year-old woman, the retirement CD would pay $229 to $279 a month for life, at the banks now offering the product. By contrast, the top 10 insurance company annuities are paying an average of $386, according to Annuity Shopper magazine in Englishtown, N.J. That's a lot of money to give up for deposit insurance. I think the banks should try again.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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