Changes to IRA Accounts

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Question:

We currently offer IRA products that allow the customer to make deposits anytime during the term of the IRA, up until 7 days before maturity. We want to change the terms of the IRAs we offer and only allow deposits at maturity. We have done some research and do not know of anything in the plan agreement that prohibits this change to existing customers. Do you know of any restrictions or regulations that would prohibit this change in terms for our existing IRAs? Also, if we are allowed to change terms for existing customers, would we be required to give 30 days' notice before the change?

Answer:

First, separate the legal considerations that surround IRAs from those regarding the investments they contain. The IRA is like the bucket that holds the investments, whether they are time deposits, stocks, bonds etc. IRA rules do prohibit certain investments. However, as you discovered, they do not attempt to control the specifics of permissible investments.

Your investment sounds like a time deposit open account or TDOA; e.g., if I bought a 4-year TDOA a couple of years ago at 5% interest, every deposit I made from that time until its maturity earns 5% interest. At today's rates, that probably turned out to be a pretty bad deal for your bank.

Your Truth-in-Savings (Regulation DD) disclosure undoubtedly said you would allow those additional deposits. That is what you want to change. In order to comply with Regulation DD, you would very definitely have to give at least 30 days' advance notice of the change to the consumer in writing. However, remember that Regulation DD tells you how to disclose a change; it is not a source of authority for allowing you to make any change you wish regardless of its effect on the consumer.

My opinion is that this was a material term to the contract and, regardless of what Truth-in-Savings would allow, you cannot change this provision until the contract matures. Terms like a fixed interest rate and early withdrawal penalty, as well as the ability to add additional funds at the original rate, would clearly have been a part of any effective shopper's decision-making process when purchasing this time deposit. Changing any of those during during the life of the contract could be considered an "unfair and deceptive" practice under the laws of many states. I would agree.

If you change the NSF fee on my checking account, I can close it and go elsewhere. However, if we enter into a four- or five-year contract and you wish to change something that is at the heart of our agreement during the middle of the term, I'm just "out of luck" (other terms are more accurate). My options are to complain to your regulatory agency or your state's attorney general.

First published on BankersOnline.com 08/02/04