Searching for the Elusive Add-On CD

I'm happy to announce we have another guest post from Charles Rechlin, a long-time reader and friend of the site. His last guest post covered the fine print of CD disclosures. In this guest post, Charles covers add-on CDs. Not only does Charles have many years of experience in CD investing, he also worked as an attorney representing clients in the financial services industry. I'm very thankful he has offered to share his experience with us.

Notes on Personal CD Investing: Searching for the Elusive Add-On CD

by Charles Rechlin

It’s a sad commentary on the trajectory of CD rates that I’m still actively on the lookout for add-on CDs.

Thanks to the world’s central banks, these accounts remain potentially as attractive to me in mid-2016 as they were when I opened my first one in 2010.

They’re a good fit with my habitually negative outlook on financial markets. Like the “permabear” of stock investing, who always thinks the S&P 500 will end the year lower than it began it, I tend to believe that CD rates—one, two, three years out—will probably be lower than they are today. Or at least not appreciably higher.

The following discusses some of my observations on, and experiences with, add-on CDs.

A Good Add-On CD Is Hard to Find

An add-on CD is a fixed-term account that permits its owner to deposit additional funds into it during its term.

This add-on right, when coupled with a fixed or guaranteed minimum rate, can make the CD a valuable hedging tool in a flat or declining interest rate environment.

Even where interest rates rise modestly, such an add-on CD can potentially have value because it maintains its rate while its remaining term steadily declines over time.

To my mind, an ideal add-on CD possesses the following features:

• a multi-year term (three or more years)
• a fixed or minimum rate that is reasonably competitive with rates offered on CDs of identical maturity that don’t carry add-on rights
• a low opening balance requirement
• an unlimited right to make additional deposits from time to time, with no maximum balance

It’s extremely difficult, if not impossible, to locate a CD combining all of these features. You’re fortunate if you can find one with a couple of them.

I suppose that’s because the handful of banks and credit unions offering add-on CDs usually know what’s on the “wish lists” of savers like me, and they just don’t want to give it to us.

Take, for example, perhaps the most visible add-on CD product offered online—CIT’s 2-year RampUp Plus CD.

This CD, in its current incarnation, doesn’t pass muster under any of my criteria.

It has a short term of only two-years, an uncompetitive interest rate of only 1.22% APY (although there’s a one-time bump-up right) and a whopping minimum opening balance of $25,000. Plus, it only permits the owner to make one additional deposit, which CIT reserves the right to limit to $250,000.

Believe it or not, I opened several of these CDs in 2012, after they were first introduced under the name “Achiever CDs”. Back then, their initial rates, along with their step-up rights, made them attractive investments without regard to the add-on feature.

In fact, I eventually used the bump-up right on one or two of these CDs, but it never made sense for me to increase their balances.

I also took a look at—and passed on—Bank5 Connect’s 24-month Investment CD, first offered in 2013. Unlike the CIT RampUp Plus CD, it has unlimited additional deposit rights, but its interest rate (currently, 1.20% with no bump-up right) has never moved me.

When I Spot a Decent Add-On CD, I Grab It

Although I’m convinced I’ll never find the perfect add-on CD, sometimes the stars are aligned in a way that I discover one that’s at least decent. And, being the inveterate pessimist I am, I jump at it.

I suppose the best add-on CD I ever found, all things considered, was offered nationally, online, in 2010 by Androscoggin Bank. (I only began investing in CDs in late 2008, so I missed all the good deals before then.)

This CD had a 2-year term, a 2.00% APY, a minimum opening balance of $500 and a right to make additional deposits, in increments of at least $100, with no maximum balance.

Suspecting that interest rates were going to continue heading south, I opened three of these CDs with small initial balances. One had no payable-on-death (POD) beneficiary, the other two had distinct POD beneficiaries.

Within a year, relying on the POD accounts to bulk-up my FDIC insurance, I’d deposited significantly in excess of $250,000 into these CDs. By the time of my last deposit, I, in effect, owned three one-year CDs with a 2.00% APY, well above what was then available for 12-month CDs.

Another good, although misunderstood, add-on CD deal was a 5-year online CD promoted by Live Oak Bank in 2015. This CD carried an extremely competitive 2.50% APY and, while requiring hefty opening balances—originally, $25,000, and later, $75,000—provided the option of making unlimited deposits of at least $1,000 each during its term.

Unfortunately, the bank didn’t do the paperwork with sufficient care, and many savers became confused, suspicious and even downright angry at Live Oak as a result. Thus, the website FAQs said there was a $250,000 maximum balance, while the signature card made available to customers stated that additional deposits could not be made at all after the CD was opened.

However, the Truth in Savings Act (TISA) disclosure linked in the online application—and later mailed to account owners—clearly stated that additional deposits were permitted without any limit whatsoever, provided they were in the amount of at least $1,000. I opened two of these CDs, one with a POD beneficiary.

As of today, having discussed the issue further with the deposit account staff at Live Oak and opened a third Live Oak CD with a distinct POD beneficiary, I have more than $250,000 deposited in one of my original 5-year CDs.

Finally, I’ll mention the 34-month and 54-month Rate Climber CDs, offered nationally by Elements Financial FCU (formerly Eli Lily FCU) as part of its regular suite of CD products. I’ve opened several 54-month Rate Climbers in the past year or so.

The Rate Climber is primarily a step-up CD, giving the owner a one-time right to raise the rate on his or her CD should the credit union at any time post a higher rate for this particular CD product.

Embedded in the bump-up right, however, is a right to make one additional deposit into the CD at the time the owner elects to increase the rate. There’s no limit on the amount of the additional deposit.

The Rate Climber is hardly an ideal hedging device, largely because the ability to add to the balance is a one-shot privilege dependent upon an increase in interest rates. Nevertheless, there’s some potential hedging value because, while 3- to 5-year interest rates may go up, the CD’s maturity date stays the same, and therefore the remaining term of the CD is always declining.

Say, for example, you open a 54-month Rate Climber today at its current posted rate of 2.00% APY (competitive for a CD with a term between 48 and 60 months). Should, two-and-a-half years from today, Elements increase the posted rate on 54-month Rate Climbers to 2.50% APY, you have the opportunity to put additional funds into what is the equivalent of a 2-year CD at that rate. A 2.50% APY could very well be a favorable rate for a 2-year CD at the time.

Anyway, the minimum deposit to open a 54-month Rate Climber is only $1,000. So, if you open one at that level and things don’t work out the way you plan, your downside exposure is limited.

A Major Risk of Add-On CDs: A Reneging Bank or Credit Union

Those who have followed the saga of Valor Credit Union (formerly, Tobyhanna FCU) and its 7-year “Prime Rate Certificate” on this website are well aware of the main risk of opening an add-on CD—namely, that the deal becomes so attractive to the customer and so unattractive to the bank or credit union that the latter tries to renege on it (see post).

This can be attempted by unilateral amendment to account documentation retroactively capping the add-on right, imposition of a fee for making additional deposits, or who knows what other machinations.

Thankfully, I never opened the Valor CD, not because of this risk, but because the credit union informed me it didn’t permit withdrawal of posted dividends before maturity. That’s always a non-starter for me.

But, although Valor may be a particularly egregious example of an institution unilaterally re-trading an add-on CD deal, the credit union isn’t alone. The right CIT Bank currently reserves to limit the additional deposit into a 24-month RampUp Plus CD to $250,000 originated in an amendment to the bank’s account terms that applied retroactively to then outstanding CDs!

So, when looking at add-on CDs, just remember this: Don’t expect too much, and be careful out there.