While the SEC and other regulators try to help consumers by pushing the investment community to provide more information, the Treasury is doing little to help buyers of U.S. savings bonds. The Treasury has forgotten that it too has a responsibility to ensure that consumers know what they are buying.
According to Savingsbondadvisor.com, more than 11 million Americans own a savings bond, which people often buy for others as well as themselves. Most people understand that when you buy a $100 EE Savings Bond for $50, it will eventually be worth $100. What they don't understand is how long that will take. Most people believe that savings bonds reach face value between seven and 10 years, but it takes much longer.
Let's assume that a grandmother decides to buy a $100 EE Savings Bond for $50 this month and gives it to her newborn granddaughter. She hopes that her granddaughter will use the bond at maturity when it's worth $100, or more. What she probably doesn't know is that the bond will only reach $100 if it is held for 20 years, and at the current interest rate, it will actually be worth $66, not $100, in 2031.
The 1.4% current rate on EE Savings Bonds accrues monthly. These bonds mature in 30 years, which is when they will stop paying interest. But if a bond bought this month won't achieve face value exactly 20 years later, the Treasury "guarantees the double" with a special payment on the first month of the 20th year. The Treasury then may reset interest payments for the remaining 11 months, although there's no guarantee.
In effect, the U.S. EE Savings Bond pays 3.5%, if it is held for 20 years. Bondholders who elect to redeem the bond earlier receive a 1.4% compounded payment. If you cash in the bond within the first five years of purchase, there is an early-redemption penalty of three months interest.
U.S. savings bonds should be clearly explained on the official website and when consumers purchase these bonds at financial institutions around the country. The explanation of the guaranteed double isn't easy to find. Doesn't the Treasury have an obligation to place the interests of consumers first by placing a market value on the book-entry savings bonds?
If the government were to follow the rules recently mandated on the credit card industry to illustrate in large print how many years it takes to pay off debt, buyers of U.S. savings bonds would receive an easy-to-understand illustration of the guaranteed double. I'd bet that very few consumers know that a balloon payment in 20 years is their hope of face value.
Marc S. Freedman, CFP, is president of Freedman Financial in Peabody, Mass., and author of Oversold and Underserved: A Financial Planner's Guidebook to Effectively Serving the Mass Affluent.