Unrealized Potential: Savings Accounts In A Retirement Plan

A feature of the US banking system that mystifies many foreign observers is the wide spread in savings account interest rates. On February 14, rates on savings accounts reported by Bankrate.com ranged from 0.01% to 4.15% with an average of 0.23%. In general, the low-paying banks are the large ones with extensive branch networks and name recognition while the high-paying banks are small, mainly single office or entirely internet based.

These large price differences reflect the low importance consumers attach to savings account rates relative to other bank features, including locational convenience, name recognition, and the convenience of having access to multiple bank services from one source. A way for high-rate paying banks to offset these disadvantages is to modify their savings accounts in a way that makes the rate important to consumers. A promising way to do that is to transform the savings account into a retirement savings account or RSA.