Rethinking Guaranteed Investment Contracts

For years, the vast majority of corporate employees making 401(k) pension plan choices opted for fixed-income funds made up of guaranteed investment contracts. Backed by bonds and a pledge that the contract would deliver a specific rate of return, GICs seemed a lot safer than putting your precious retirement nest egg into the stock market, with its wild swings. And if the bonds tanked, the insurance companies providing the GICs promised to make up the difference.

But GICs have fallen from favor in the wake of several major insurer collapses, which have rendered the contracts' promises worthless. Some corporate pension plans will do well to get back a fraction of their GIC principal. Also, employees are waking up to the fact that, over the long term, the stock market gives a superior return. According to a study by the consulting firm A. Foster Higgins & Co., the GIC share of retirement plans dropped to 54% this year from 58% in 1991 -- and before too long they could be eclipsed by stocks.

But for some, GICs remain a good idea. Many of the contracts are backed by bonds issued several years ago, when interest rates were higher. So returns (ranging from 6% to 9% yearly) outshine those of bank certificates of deposit, now about 3%. The trick is to make sure that your company's 401(k) plan uses GICs issued only by top-rated insurers and that the risk is spread among GICs from several providers. A rating of A or above from A.M. Best Co. and S&P indicates that the insurer is financially sound.

Who should go for GICs? Certainly, people nearing retirement, who need intact principal. Then there are those who may have to withdraw their savings -- and also need GICs' assurance that the principal is safe. Should big medical bills loom, you can withdraw the money, although there's a 10% penalty. And for the next year or two as the older GICs deliver high returns, anyone can profit by keeping a portion of their money in GICs.

If you work for a company that is downsizing, GIC funds may make a decent cushion during possible unemployment. Says Judith Markland, a vice-president at GIC-provider John Hancock Mutual Life Insurance Co: "Anyone in the computer or auto industries should be in a GIC." Despite the GIC's problems, guaranteed is still a comforting word.

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