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MONEY

Guaranteed Investment Contracts

Information on investing in guaranteed investment contracts.
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Companies that have 401(k)s or other types of long-term qualified savings accounts may want to consider guaranteed investment contracts (GICs), an investment strategy that offers safety as well as the opportunity to profit from interest-rate increases.

GICs work something like certificates of deposit, except they're sold by insurance companies. "Companies pay money in return for a contract that promises them the return of their principal plus an investment yield, at whatever point the GIC matures," explains Bill Wolff, a vice-president at The New England, a Boston-based insurer. GICs bought for 401(k)s usually permit deposits to be timed throughout the purchase year to coincide with employees' deferred-income plans.

Companies can choose between two types of GICs: participating or nonparticipating. The first variety offers investors a variable rate of return -- thus, they participate in the risks and rewards resulting from interest-rate fluctuations. Nonparticipating GICs earn fixed rates of return. GICs' are typically higher than CDs' by a percentage point or so at the time of purchase. "In a market where interest rates are high, it may make sense to buy a nonparticipating GIC and lock in that high return," says Wolff. "But today, when it's a good bet that interest rates will eventually rise, it may make better sense to go with a participating GIC instead."

At Bommer Industries Inc., a 200-employee manufacturer of builders' hardware, management is so sold on participating GICs that it has decided to invest all funds accumulated in the company's nine-year-old thrift plan in them. "We're very conscious of our fiduciary responsibility in managing our employees' long-term savings, so we like the safety feature," says Charles Martin, Bommer's vice-president for finance.

One caveat: unlike CDs, GICs are backed by the financial health of your insurer, not by the federal government. Since GIC funds are typically placed in relatively volatile investments like mortgages and private placements, it makes sense to verify the insurer's financial health with A. M. Best, Standard & Poor's, or Moody's before finalizing any contract.

-- Jill Andresky Fraser

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Last updated: Jul 1, 1991




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