Question: At work we were told that GICs are a great investment. Can I purchase them in my BUYandHOLD account?

A BuyandHolder

Answer:

Dear BuyandHolder,

BUYandHOLD does not offer GICs, but the following is some information that I believe you will find useful on the topic.

What they are

For those who are unfamiliar with GICs, they are Guaranteed Investment Contracts issued by insurance companies. They are, in fact, a debt instrument, usually in large denominations and purchased most often for retirement plans. That's probably why you learned about them at work - in connection with your company's 401(k) plan.

The "G" word

Although this debt instrument contains the word "guaranteed," that can be misleading. GICs are not backed by the full faith and credit of the U.S. government as EE Savings Bonds and Treasuries are. Nor are they FDIC insured as are bank deposits and bank-sold CDs.

They are guaranteed, but only by the insurance company that issues them. The interest rate (which is usually fixed but can be a floating rate) is guaranteed over the life of the contract. The life (or time period) is typically one to five years.

Think of them as the life insurance industry's equivalent of bank CDs. They tend to yield about two-thirds of a percentage point more than U.S. Treasuries.

More specifically...

The insurance company invests the cash it raises in a number of conservative investments, such as long-term bonds, public utility bonds, real estate and mortgages (when appropriate) and, to some extent, blue chip or dividend-paying stocks.

The assets of the insurance company back the principal contract so that any default in an underlying issue or a drop in interest rates is absorbed by the insurance company.

Employee involvement

Most employees who have a retirement plan that allows them to select where to invest their money, select GICs yet know very little about them. That's because the contracts are sold directly to the pension plan and not to individuals.

However, as a member of a 401(k), 403(b) or 457 plan, you are legally entitled to a quarterly, semi-annual or annual report from your plan manager, detailing how your plan is performing. When you receive yours, check for the name of the insurance company that sold GICs to your plan.

Then ask your plan manager for an independent rating of the insurance company. These ratings are issued by A.M. Best, Moody's and Standard & Poor's. You should not invest in a GIC of a parent company ranked below A. If the insurance company becomes insolvent, your GIC could become worthless.

Bottom Line

GICs are basically safe and pay more than money market funds, bank deposits, CDs and U.S. Treasuries. They may not keep pace with inflation but they do shield one's portfolio against stock market volatility. However, you should not have all of your 401(k) in GICs. Doing so means you will miss out on opportunities to make profits with carefully selected stocks or stock mutual funds.

Good luck!