Banks are encountering new obstacles in their drive to market an innovative certificate of deposit that offers retirement savers a tax break and a guarantee of future income.

The latest salvo came from New Mexico's state insurance commissioner, who brought suit in federal court late last month to block sales of the so-called Retirement CD by First National Bank of Santa Fe.

It was the second move in recent months by a state insurance commissioner to halt sales of the product. In August, Florida's commissioner filed an administrative claim in a bid to shut down sales by Blackfeet National Bank, Browning, Mont., which is promoting the CD in several states.

Federal banking regulators gave their blessing to the Retirement CD in May. But the product, which is a hybrid of a conventional CD and an annuity, quickly drew fire from some members of Congress and the insurance industry.

Critics argued that banking regulators had overstepped their bounds by extending federal deposit insurance to an insurance product. In states like Florida and New Mexico, which strictly limit the insurance powers of banks, the criticism was especially vehement.


Both cases are expected to drag on for some time before they are decided. Though some banking lawyers believe banks have the upper hand in the dispute, the cases are clearly worrisome to those who want banks to be able to offer the hybrid product.

While an adverse ruling in New Mexico or Florida wouldn't preclude banks from selling the Retirement CD in the other 48 states, "it would give the other states precedent to say no," said David W. Roderer, a partner in the law firm of Winston & Strawn, Washington.

What's more, congressional opposition to the Retirement CD may be mounting. Sen. Alfonse D'Amato, who has been an outspoken foe of the Retirement CD, is expected in January to reintroduce a bill to strip the product of federal deposit insurance.

And the New York Republican is in a strong position to get his way: Sen. D'Amato is in line become chairman of the Senate Banking Committee. Cosponsoring the measure is Sen. Christopher Dodd, D-Conn., a longtime foe of bank insurance powers.

Bankers see the Retirement CD as a promising way to win over customers who are flocking to annuities. In 1994, consumers are expected to pour $75 billion into annuities, according to Cerulli Associates, Boston.

So far, only two community banks are offering the product, developed and marketed by American Deposit Corp., Pine, Colo. Officials at both banks declined to say how much money the Retirement CD has attracted so far.

But there are signs that bigger banks will jump into the fray. A BankAmerica Corp. spokesman acknowledged previous reports that the giant institution had reviewed a proposal from American Deposit, though he added that there are no immediate plans to offer the product.

The Retirement CD's distinguishing trait is that it allows a bank to turn a CD into a retirement-planning tool.

With the product, a bank customer can make an initial deposit of at least $5,000, and subsequent deposits of at least $1,000, into CDs with maturities of at least one year.

When the CDs come due, the customer can leave a portion of the deposit in the bank, where the money continues to earn interest on a tax-deferred basis until the customer's retirement.

At retirement, the customer can withdraw up to two thirds of this tax-deferred money. The remainder is used to calculate equal monthly payments the bank will send out for what it figures will be the rest of the customer's life.

If a person lives beyond his expected lifespan, the payments continue. This means the bank that issues the Retirement CD is on the hook to pay more than it took in from long-lived customers.

But the insurance regulators have their doubts about banks' ability to manage the product.

Florida's insurance department is concerned that Blackfeet, an $11 million-asset bank, isn't big enough, or savvy enough at actuarial work, to be a reliable source of retirement income for Floridians, said Dennis Silverman, senior attorney for the agency.

New Mexico's insurance department hopes to ban sales of the Retirement CD on the grounds that the product is an annuity that banks are not allowed to underwrite or market in New Mexico, said Thomas Rushton, New Mexico's deputy supervisor of insurance.

The department's action was a counterclaim to a civil suit First National Bank of Santa Fe filed in early November, seeking to bar the insurance regulator from halting sales of the Retirement CD.

Meanwhile, First National is continuing to market the product through television and print advertising in New Mexico.

Blackfeet hasn't done any promotion since it announced plans to sell Retirement CDs in February, said the bank's president Jack Kelly. But he said Blackfeet planned to start placing ads in the Wall Street Journal and other nationally distributed newspapers in a few weeks.

The Retirement CD: A Chronology


* Banking regulators give Blackfeet National a green light to offer an insured CD with the features of an annuity.

* Rep. John D. Dingell, D--Mich., presses regulators to withdraw their approval.


* Florida's insurance commissioner files suit to stop Blackfeet from selling the Retirement CD in the state.

FALL '94

* Competing bills are introduced in Congress--one authorizing the retirement CD, the other seeking to strip it of federal deposit insurance.

* First National Bank of Santa Fe becomes the second bank to sell the product. New Mexico's insurance commissioner seeks to block sales.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.