A Sneaky Way Banks Keep People's Money: Rollover CDs

April 01, 2024

In my recent YouTube video, I drew attention to the sneaky way banks keep people’s money…

CD Rollovers.

The Consumer Financial Protection Bureau defines these kinds of CDs this way: 

A rollover or renewal can occur at the end of the term of a CD. 

If your CD has a rollover or renewal, the money you originally deposited will be invested in a new CD. The interest already earned may also be invested in the new CD. Some CDs don’t have a rollover feature so when they mature they will stop earning interest.

Your bank or credit union may rollover your CD automatically at the end of the CD term unless you tell them not to. However, a bank or credit union is required to send you a notice in writing before the CD matures, and the notice will tell you when your current CD ends and whether it will renew automatically.1

This practice is not inherently wrong if the customer fully understands and desires it. However, my concern lies in the banks tendency to communicate this through postal mail and only give customers a short window in which to respond before they auto-roll it again. According to Bankrate, that time frame is “typically 7 to 10 days.”2

This is concerning for a few reasons.

  • We are less reliant on postal mail these days. Important letters can easily go unnoticed or discarded amidst the busyness of life.
  • A 7 to 10-day notice period is alarmingly brief, especially for significant financial and investment decisions.
  • Effective and proactive communication is crucial to financial services, and this practice falls short of optimal client service. This is impersonal and reduces relationship among people to paperwork.

I’m not the only one who has noted the problem with this. One Investopedia writer, in a 2023 article titled “Why It's Almost Never A Good Idea to Let Your Maturing CD Roll Over”, points out another concern and gives a real world example: 

The problem—and it's a big one—is that automatic CD rollovers give you zero choice on the certificate your funds will be moved into. The bank will simply transfer the funds into its standard-menu CD that most closely matches the duration of your original CD… 

That may not seem like a big deal, but it can cost you big time. That's because banks and credit unions always roll your proceeds into a standard CD, never a promotional offer with a more attractive rate. So for example, while NASA FCU's 15-month promo certificate pays 5.45% APY, its current standard 12-month CD pays just 4.75% APY.3

Shockingly, this is “the industry-standard practice across banks and credit unions that offer CDs.”4

Additionally, when a CD matures, it is possible that due to changes in Federal Reserve interest rates, the new CDs with the same term may have significantly lower interest rates than the previous CD. Conversely, rates may have increased. Rollover CDs may be good news too.

However, with automatic rollovers, you surrender control over the specific CD product your money is reinvested in. To ensure you make the best decisions aligned with your financial goals, it’s important to understand the terms or to consider enlisting the guidance of a financial advisor.

One of the benefits of having a trusted financial advisor or wealth manager is that they should be regularly communicating with you—and not just by mail—and can explore a range of FDIC insured CDs, Treasury bills, money market funds, tax free municipal bonds, and an array of other income investment vehicles.

Remember a good wealth manager should manage your investments strategically, aligning risk and reward with your long-term financial goals—not just chase the highest CD rates at any given time.

While bank CDs may offer safety, it’s essential to be aware of potentially unfavorable terms that could limit your investment options and returns.

You and your money should not get stuck in a financial relationship you don’t want because you went out of town for a week or two or didn’t check the mail.

-----
Sources:

1 What is a certificate of deposit (CD) rollover or renewal? | Consumer Financial Protection Bureau

2 How To Renew A Certificate Of Deposit (CD)

3 Why It's Almost Never a Good Idea to Let Your Maturing CD Roll Over

4 Ibid.