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Personal Finance Blog By MoneyRates - November 2011

Banks launch new, subtler fees

November 30, 2011

| Money Rates Columnist

True, Chase dumped its plan to charge a $10-a-month checking account fee and Bank of America dropped its plans for a $5-a-month fee on debit cards. But if this seems like a trend toward cheaper banking, think again.

Instead of sticking with its much-publicized new charges, banks are resorting to quietly bumping up fees customers are already paying, hoping they won't notice or, if they do, that they won't get mad enough to move to another bank.

Here are a few examples:

  • Bank of America plans to roll out a new selection of checking accounts next year that carry fees ranging from $6 to $25.
  • Citibank has boosted its basic checking account fee from $8 a month to $10.
  • TD bank is now charging $15 for incoming wire transfers.

The crush of fees is a result of the banks looking to recover the revenues they stand to lose from caps on overdraft fees and debit card swipe fees, which is costing them an estimated $12 billion a year, according to the New York Times. That translates into $15 to $20 a month from each depositor.

In addition, many banks are also actively cutting costs, closing branches and reducing interest paid on CDs and savings accounts. While customers may be able to avoid some of the charges by increasing their number of accounts or depositing more money with their bank, it seems customers may have to be extra vigilante in the coming months to avoid new fees.

The flurry of new, subtler charges has prompted federal lawmakers to push for streamlined disclosure forms for bank patrons opening new checking accounts. The typical disclosure form now is more than 110 pages, and lawmakers would like to see them condensed to something akin to a food packaging label. The hope is that this would make it easier for consumers to shop around and compare.

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Survey highlights financial worries for American workers

November 29, 2011

| Money Rates Columnist

A new study from MassMutual Retirement Services shows that more than half of Americans older than 50 are considering working later in life because they don't have enough in their savings accounts to provide for a comfortable retirement.

The survey of workers eligible to participate in an employer-sponsored defined contribution plan, such as 401(k) savings accounts, also found that the biggest financial worry among men is saving enough for retirement. Women, meanwhile, were more concerned about having enough money to keep up with monthly expenses.

Other findings from the survey, which was conducted by Brightwork Partners in June and July 2011, include:

  • More than a third of the workers surveyed have considered delaying retirement beyond their original date, with the percentage climbing steeply for those older than 50.
  • Two-thirds expect to work at least part-time and more than half figure they won't have enough to maintain their current standard of living in retirement.
  • Workers who are less than 30, perhaps cognizant of how low current mortgage rates are, are concerned about saving to buy a home. This concern ranked behind only meeting monthly expenses for this group.

The survey indicated that the percentage of people taking steps to improve their retirement savings accounts is far greater than the percentage who are diminishing their retirement savings accounts by decreasing contributions, taking loans or hardship withdrawals, or suspending contributions altogether.

Among those taking positive steps were:

  • About 19 percent of respondents said they are increasing their savings rate
  • About 18 percent said they are contributing to an IRA
  • About 19 percent said they are reallocating existing portfolios

Still, the survey found that Americans are taking a dim view of the U.S. economy. Almost one-third think the U.S. will be in another recession in the coming year, and nearly 40 percent are somewhat or very concerned about losing their jobs.

The biggest concern for people older than 60 is the "expense of catastrophic illness" and having the funds needed to provide long-term care for themselves or their spouse.


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Oil prices threaten savings account rates

November 27, 2011

| MoneyRates.com Senior Financial Analyst, CFA

In the statement from the November meeting of the Federal Open Market Committee, the Federal Reserve expressed confidence that inflation would "settle." But in the short time since that meeting, inflation has shown no signs of doing so.

The source of trouble, as is often the case, is the price of oil, which has taken a sharp turn upward recently. With increases like this, inflation could continue to overwhelm interest rates on savings accounts, money market accounts, and CDs.

Resurgent oil prices

The price of a barrel of oil slipped quite a bit after peaking at $113.93 at the end of April. By early October, it had fallen as low as $75.67, a decline of 33.6 percent. Since then, though, oil has reversed course fairly dramatically.

The price of a barrel of oil rose by 17.7 percent in the month of October, and the trend has continued in November. Oil prices once again are threatening the $100-a-barrel mark. With this, rising oil prices and their ripple effect across inflation could further erode the value of savings accounts.

The threat to deposits

You've probably noticed the phenomenon at your local gas station: When oil prices rise, the price of gas is quick to follow, but when oil prices fall, gas prices are a little slower to respond. As unfair as it seems, this is just a cautious business practice. The gas companies don't want to get caught in a squeeze where the cost of crude oil rises faster than the retail price at the pump.

If you extend that principle across all businesses that are affected by oil prices--which, considering transportation costs, includes most things--you can understand why oil is such a powerful inflation threat. To use the Federal Reserve's term, inflation didn't exactly "settle" while oil prices were falling in recent months, but you can expect inflation to gain new momentum from the recent resurgence in oil prices. With current interest rates on savings accounts, CDs, and money market accounts languishing near zero, expect purchasing-power losses to continue for depositors.

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J.P. Morgan plan simplifies 401(k) options

November 25, 2011

| Money Rates Columnist

J.P. Morgan Asset Management is hoping to take some of the risk and a lot of the guesswork out of 401(k) retirement savings account investment decisions.

The company's new Core Menu Innovation would reduce the typical 401(k) retirement savings accounts' 18 investment options with three basic investment choices, each consisting of diversified portfolio of the following:

  • Stock strategies
  • Bond strategies
  • Cash alternative strategies, such as stable value funds and money market funds

The proposal comes at a time when savers who are presented with too many options make poor choices or no choice at all, leaving them with less money for an adequate retirement, according to the J.P. Morgan statement.

The simplified options are one way to build in professional guidance for future retirees. Studies have shown that investors who get professional advice make a median annual return that's 3 percent higher than those who go it alone--a higher margin than even the best cd rates today.

As U.S. companies have steadily cut or abandoned pension plans for their workers, 401(k) retirement savings plans have become the primary source of retirement funds for many Americans. In theory, that's fine--particularly since many companies with 401(k) plans have started to automatically enroll their workers.

There are a few serious problems, however:

  • Most workers don't save nearly enough for an adequate retirement. The Financial Post recently reported that two-thirds of Americans said their biggest financial fear is not having enough money in their savings accounts for retirement; a decade ago, only half said that was their top worry.
  • Many employers suspend contributions when the economy gets tough. In 2009, for instance, almost one-third of U.S. companies with 401(k) savings accounts were modifying their matching contributions, according to a Grant Thornton report.
  • Many employees suspend contributions when their cost of living climbs or they lose a job, preferring to keep their money in regular savings accounts, money market accounts or even their checking account, where they can easily access it.

But perhaps the biggest problem with 401(k) plans leave investors to the vagaries of the stock market. If a downturn occurs when you're in your 30s, no problem; you have time to recoup your losses. If a downturn occurs in your early 60s, however, it's a much bigger issue.

J.P. Morgan expects its new system will deliver a better return for most 401(k) savings accounts, and they hope this option will be rolled out next year by defined contribution plan sponsors.

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Big bank executives move toward smaller banks

November 25, 2011

| MoneyRates.com Senior Financial Analyst, CFA

A new trend in banking has the makings of a movie script, a comedy with a light undertone of social commentary--perhaps a Tom Hanks vehicle.

American Banker recently reported that former executives from large banks are starting to find homes at smaller, more community-based institutions. It makes sense--with some megabanks actively cutting back, combined with a concerted government effort to shrink banks previously considered too big to fail, there should be both waves of executives cut adrift. And as smaller banks grow from the customer exodus from big banks, they need more talent to help them handle it.

The question is: Will this be a match made in heaven--or just a new type of hell for bank customers?

A happy ending for checking and savings accounts?

While seeing that most vilified of creatures, the megabank executive, finding his way into smaller community banks could seem like a cruel irony for anti-bank protesters, there are three reasons this particular movie script could have a happy ending:

  1. Retail banking wasn't the real problem at megabanks. The average bank customer cares more about rates on savings accounts and fees on checking accounts than the misdeeds that led to most bank failures. The two biggest sins of megabanks--predatory lending and excessive speculation--don't enter much into the typical retail banking relationship. Remove those temptations, and a big-time bank executive might do just fine in a smaller bank.
  2. Big bank executives have lived through some classic blunders. From disastrous financial decisions to spectacular PR gaffes, big bank executives have had plenty of opportunities to learn from their mistakes. Human beings are adaptive, so it is possible those executives could emerge from the experience more cautious and sensitive.
  3. Smaller organizations keep executives more responsive. The community banking environment reinforces a greater sensitivity to customers. Without the layers of organizational insulation that protect megabank executives from customers, those executives could become more understanding of those customers.

The bottom line is, this movie could end with the big-time bank executive finding happiness at a smaller bank--but only if the bank's customers are happy with the move as well.


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