Recently About individual development accounts
Participants who save in an IDA have their money matched, dollar-for-dollar. Hundreds of organizations and more than a dozen states are now using Individual Development Accounts to help clients buy homes, set up businesses and save for school. There are about 50,000 such accounts around the country. That number may grow.
Individual Development Accounts are a relatively new form of matched savings accounts that enable income-eligible families to save for assets like a home, education expenses or.
Grant recipients help low-income participants set up and use special savings accounts called individual development accounts (IDAs). Chapman introduced Soule to the Individual Development Account (IDA), an investment vehicle that encourages systematic saving and provides itemized statements that track spending habits. Welfare recipiency and savings outcomes in Individual Development Accounts, Social Work Research.
In addition to earning match dollars, participants learn about budgeting, saving, banking and more when they open an IDA. In most cases, people who open IDAs (account holders) are required to attend financial education classes. After signing up for an IDA program, each participant opens an account with a partnering bank or credit union. The bank or credit union handles all transactions to and from the IDA. Each month, IDA participants receive a report telling them how much money - savings, match and interest - is accumulating in their IDA.
Account holders may also receive one-on-one counseling and other training. The match is designed to encourage and help account holders to save enough to buy an asset, such as a house or business.
A bill currently in Congress would provide more than $1 billion to set up about 900,000 IDA accounts. As promising as IDAs are, they don’t always work. Studies have shown they’ve been used most effectively by people with steady jobs who are strongly motivated to improve their financial situation.
Any individual, organization or business can contribute match dollars to IDAs. In most cases, donors can get a tax deduction for contributions to IDAs, and they are also recognized for helping others in their community.
The “Savings for Working Families Act” would cover 100 percent of matching funds (up to $500 per account holder per year), and provide $100 for each new account opened and $30 for each account maintained. IDAs also offer a mechanism for drawing so-called “unbanked” households (people without bank accounts) into the financial mainstream. The impediments to having a bank account are a policy concern in so far as these households may pay more in fees, face a loss in personal security, forego an opportunity to build a credit rating, or accumulate less savings. One group of researchers is already promoting efficient account processing as the way to increase the impact of the IDA strategy. This approach removes IDAs from the domain of retail depository institutions and experiments with accounts based on 401(k) processing systems (Tufano 2001). Another broad coalition of IDA activists supports federal tax credits to for-profit depository institutions to mitigate the costs of contributing match funds. Differences in state legislation and policy initiatives have also resulted in various types of institutions holding IDA accounts. The Center for Urban Affairs program at Michigan State University recruits special-mission credit unions to administer IDA programs. 10 The federal government’s Assets for Independence Act demonstration, offering the single largest pool of money for IDA service providers, comes with its own set of specifications for involvement by financial institutions. Two others indicated the accounts probably do not lose money for the bank. Among 13 credit unions, 23 percent (3) report that accounts do not cover their costs and another 23 percent (3) indicate they do not consider breaking even given their goals. Another three are waiting to judge costs based on future lending opportunities. The majority of institutions require no minimum balance for opening an account, although eight banks require opening deposits of $1 to $30, and seven credit unions require opening balances of $5 to $2 At the time of the interviews, about half of the banks in the sample had opened 30 accounts or fewer, and over three-quarters of credit unions held fewer than 50 accounts each. Variety of Institutional Partners Looking at features such as size, branch location or organizational mission does not suggest a particular type of financial institution to partner in an IDA program. The relatively few CDFI-designated banks and low-income credit unions in the district may also explain why more local service providers have not opened IDA accounts at institutions with economic development missions. Another way to account for institutional diversity is in the risks and rewards to participation.
Accounts do not cover costs as currently designed at 34 percent (15 of 44) of banks. Another 34 percent of bank respondents steer away from cost measurements given their community development reasons for participation.
For large banks, CRA service credit is awarded for holding the IDA accounts and investment credit is awarded for contributing match funds. Forty-nine percent of banks (23 of 47) participate exclusively for community outreach, CRA credit, or both (i.e., they indicate no business motivation). Among all 1,591 credit unions in the district, 7 percent (59) have a CDCU or LICU designation. 62 percent of banks (28 of 45) reported that low- and moderate-income IDA account holders fall within the spectrum of their existing customer bases, although some indicated that IDA participants represent the lowest-income group in this spectrum. About 80 percent of banks have been offering IDA accounts since 1998 and more than 70 percent of the credit unions began offering IDA accounts as of 200 Over 60 percent (26 of 42) of the banks and two thirds (6 of 9) of the credit unions that operate multiple locations offer IDA accounts at just one branch or office.
A few caveats about the responses deserve mention. At the time of the interviews, programs were relatively young, many financial institutions had opened only a small number of accounts, and these institutions were still forming their impressions about IDAs. Many activists in the IDA field recognize that cost-cutting measures and direct subsidies are useful incentives to encourage institutions to open larger numbers of accounts or contribute match funds. One institution relaxes certain requirements to enable some IDA participants to open checking accounts.
IDA proponents have identified various ways for financial institutions to contribute to IDA programs, spanning from servicing accounts to contributing operating funds. IDA programs, as currently structured, could not exist without depository institutions that hold the deposits and track account balances. It is therefore worthwhile to understand the contributions made and received by financial institutions from their own perspective. Thirteen percent (6 of 47) contribute to match funds in addition to holding deposit accounts. To paraphrase one respondent, a short-term deposit account is not a moneymaking product. The higher the match rate, the shorter the time it takes for the accounts to break even. In instances where financial institutions say costs are not covered, many acknowledge the possibility that a change in the design of the account could lead to more profitable results. These changes include greater automation and a larger number of accounts with higher balances. In most cases, IDA programs operate through partnerships between nonprofits that recruit and counsel participants and financial institutions that hold the savings accounts. Some institutions offer savings bonds or certificates of deposit rather than savings accounts. None of the institutions had performed a break-even analysis of the IDA accounts at the time of the interviews. The expansion is due, at least in part, to the fact that a savings strategy for low- and moderate-income individuals appeals to a range of constituencies. Community groups support IDAs because matched savings help their target populations reach goals like buying a house or attaining higher education. Federal and state governments have allocated funds for IDAs as they further the agenda of welfare reform to build the assets of lower-income families. The effectiveness of the IDA model is being measured in two national evaluations that look at impacts on individual participants, design features, and community effects.
Institutions with a mission or business strategy to serve distressed communities and target low-income individuals are relatively well represented in the sample.
Eighteen percent of banks and credit unions (11 of 62) have a designation as a community development financial institution (CDFI), a community development credit union (CDCU) or a low-income credit union (LICU). One bank drafted and plays the lead role in carrying out the area’s plan as a Federal Enterprise Community, and yet another focuses its branch on an immigrant neighborhood. IDA programs showcase the importance of financial education and related support services for clients who seek to maintain financial assets. The Consumer and Community Affairs division (CCA) of the Federal Reserve Bank of Chicago has chosen to include greater economic literacy, the use of mainstream financial services, and asset-growth among low- and moderate-income households in its mission to promote sustainable community development. When start-up costs are relatively low and financial institutions can contribute by carrying out traditional bank functions, IDA programs offer an opportunity for all types of financial organizations to support community development.
Federal banking regulators granted CRA credit for a range of IDA-related activities including making grants to IDA programs, providing staff to participate in the development of IDA programs, and making loans to IDA holders.
Institutional Mission Most institutions qualify as “mainstream”-full service entities that provide a range of traditional banking services with no particular community development mandate. The CEDRIC Web site, founded and maintained by the CCA division, contains a repository of research and other documents on consumer education, alternative financial services and community development.
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Information and Referral: Toll-free hotline serving individuals with disabilities seeking information on how to participate in poverty reduction programs. The success and visibility of Ever Widening Circle is the result of the strong collaborative ties between WID and its partners and sponsors. WID invites individuals and companies to join with us in our commitment to disability rights and support this gala event. CWII has received funding from the California Health Incentives Improvement Project, The California Endowment, the Social Security Administration, and individual training and event sponsors. “Through the Assets for Independence program, the Bush Administration is demonstrating that low-income individuals and families can and do save earned income,” said Josephine B. Robinson, director of ACF’s Office of Community Services, which administers the AFI program. “The individuals our grantees assist have shown substantial benefit from their asset acquisitions, proving that asset building is a strong tool in combating poverty.”
It also administers the AFI Resource Center that provides training and assistance for grantee organizations and their project partners. Fewer banks list business-related interests as a reason for involvement. A higher proportion of credit unions cite opening new markets and cross-selling products as their motivation. VistaShare has worked closely with the Center for Social Development (CSD), makers of MIS IDA, to become an upgrade path for MIS IDA users. The IDA module joins Outcome Tracker”s suite of modules, which are used by economic development, community development and social service agencies to manage clients and outcomes. “The IDA program is designed so a client can put money away into an account that usually yields a higher rate of return than a normal, regular checking or savings account,” says Chapman. “On top of that, it gives them access to brokerage accounts that allow them to invest in mutual funds, stocks, bonds, or money market accounts.” A resource checking account linked to a money market account that provides a better rate of return than a regular savings account.
An ATM or Visa card for the account. The IDA’s itemized statements were particularly helpful to Soule, 30, because it let her see firsthand how her spending habits were depleting her savings. She says it really helped her change her spending tendencies. When she came to Chapman, she expressed that she wanted to save for a house and for her retirement. Now, she feels she is well on her way to reaching those goals. Another goal is on the horizon as well.
