The Possible Missing Link to Your Retirement Plan?

The average Tom and Nancy Arkansan loves the safety of the good, ole fashioned certificates of deposit. There is a great deal of comfort in knowing that the CD down at the local bank is FDIC insured and there is little risk to the money that’s tucked away in such accounts.

What this fictional couple is not too happy with is the rate of return they’ve been getting on their deposits over the last few years. In fact, they’ve seen their interest rates fall from as high as 6 percent in the year 2000 to as low as a half-percent today. Tom and Nancy find themselves lamenting the days when their CD brought them double-digit returns in the late 70s and early 80s. They seem to forget that equally high inflation during those days ate away at most of the return. Nonetheless, the average Tom and Nancy saver is frustrated with getting next to nothing on his money, and is even more concerned to hear that the Fed has hinted that negative interest rates are a possibility if the economy turns sour.

Safe Road

In many cases, low rates have forced traditional savers into chasing higher yields in riskier investments, vacating the safety of FDIC insurance in order to maintain what they hope to be an acceptable return on their dollars. But all roads don’t lead to investing without a safety net.

Enter a hybrid investment product that offers an FDIC insured return of principal (if held to maturity) and the opportunity to take advantage of market-based returns. Market-Linked Certificates of Deposit are not new products, but have found popularity with the CD crowd for the aforementioned reasons. Here’s an example of how some products in this genre work:

At its core, a Market-Linked CD is a combination of a short-term, zero-coupon bond (3-7 years in maturity) and a basket of option-based investments. The idea is that most of an investor’s money is placed in the zero-coupon bond, which will mature in a set number of years, paying enough interest at maturity to return 100 percent of the original investment. A small portion of the original investment is placed in the options component in the hope that those options pay off and give a return to the investor on top of his original principal. The worst case is if a market-linked CD is held to maturity, you get your original investment back, but no interest. A best case is a return of your principal with the gains from the options component as icing on the cake. Obviously, if the options don’t perform you risk missing the interest you would have made during the term of the CD had you invested in a traditional bank instrument1.

Needs Assessment

Just like at the bank, a market-linked CD carries FDIC insurance, with limits of $250,000 per investor, per institution. But the guarantees offered on a market-linked CD only apply if it is held to maturity. Some sponsors have created what is called a secondary market where you can liquidate MLCDs before maturity, however you could get back more or less than your original investment in such markets2. Also, some issuers build in a call feature, allowing them to redeem the CD back to the investor earlier than the maturity date3. Taxation of MLCDs can be different than a bank CD4.

MLCDs are sponsored by many different investment firms and carry a wide variety of features. One way to know which product, if any, is a proper alternative to the traditional bank CD is to visit with a financial advisor. You should expect that advisor to carefully assess your entire financial situation, including your need for liquid cash over the term of the CD. Your advisor should also talk with you about all the features and risks as outlined in the materials associated with this or any other investment before investing5.


1. MLCDs have complex payout structures that impact returns as participation rates and maximum return percentages may limit upside performance.

2. May be subject to a transaction charge. Therefore, it is recommended these products are purchased with the intention of holding them until maturity.

3. If the issuer exercises the call option, the investor will only receive the applicable call price and will not receive any interest payments that would have been payable for the remainder of the term of the MLCD. 

4. Investors typically pay annual taxes. Their returns are considered interest income and taxed at the investor’s ordinary income tax rate. Market-Linked CDs also subject to the paying ability of the issuer. The Cost associated with MLCDs is typically embedded which may adversely affect the value on the pricing date to be less than the original deposit amount.

5. There is no guarantee that any growth or risk-management strategy you seek to implement through a Market Linked CD will be successful. Investors are subject to the unique risks of each underlying market measure. This article is for general information only and is not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, Member FINRA/SIPC.