"As CD rates started dropping, the marginal difference in the APY (average percentage yield) between CDs and other liquid accounts such as savings or money markets shrank," he says. "It's reached a point that for some consumers, the marginal difference was not enough to justify locking the money up for a certain term."
McBride agrees. "There's not enough of a yield premium on longer-term CDs to justify taking the risk of that early withdrawal penalty," he says.
Savers seem to be catching on to this predicament. Since Bankrate published its last survey in February 2010, the amount of money in CDs nationwide has declined by 35 percent, according to the Federal Reserve. In that same period of time, savings account deposits have risen by 26 percent.
CDs still play a role
Despite low yields and increasing CD early withdrawal penalties, CDs still have a role to play for investors, McBride says.
"CDs are conducive to a few things: generating a predictable stream of interest income for retirees, but also aligning your cash availability with specific expenses at points in the future," he says. "If you know you have tuition payments that you have to make at a certain time every year, you can invest in CDs that will mature around that point in time."
Sometimes the threat of a CD early withdrawal penalty can actually help investors by enforcing a little fiscal discipline, Grealish says.
"There's a behavioral value because these funds are at least somewhat committed to the maturity date, so investors have a way of mentally segregating those in their mind," he says. "It makes it less likely that the assets will be used for consumption or spur-of-the-moment investing as a savings account or a money fund might."
Even so, there is little overall incentive to accept the lack of liquidity inherent in CDs if there is any chance you might need to withdraw the money before the term is over, McBride says.
"You have to develop a realistic assessment of your timetable," he says. "How long can you afford to live without the money, and do you have a sufficient emergency savings cushion or other access to cash so that you don't need to liquidate a CD prior to maturity?
"A lot of people just aren't in a position to invest in CDs regardless of returns because they don't have sufficient cash reserves," McBride says. "Only 24 percent of American households have an adequate emergency savings cushion."