What is it?

1. What is it? • Traditional Guaranteed Investment Contract (GIC) • An insurance company receives deposits from a benefit plan or other institutional customer, and then issues a fixed-rate contract. • They are frequently offered as one of several investment options in 401(k) plans. • The deposits paid to the insurer are used to purchase investments that are held in the insurance company’s general account. • Fixed-income investments are the most common purchases. • The benefit plan is a creditor of the issuing company and has credit risk. • Generally, the GIC issuers have high credit-quality ratings.

2. What is it? • The insurer offering the GIC is contractually obligated to repay the principal and specified interested guaranteed to the 401(k) or other benefit plan. • The plan’s provisions permit the participant to withdraw funds from the fund at book value (also known as account or contract value) for reasons such as: • Loans • Hardship withdrawals • Transfers to other investment options offered by the plan • Companies can choose between two types of GICs: • Participating: Offer the investor a variable rate of return based on interest-rate fluctuations • Nonparticipating: Earn fixed rates of return

3. When is the use of this tool indicated? • When a company or other organization wishes to have secure funding for its obligations under various qualified retirement plans • Including 401(k) or 403(b)(7) plans • When an organization does not wish to have the responsibility of investing and managing assets under a retirement plan • The organization elects to transfer those responsibilities to an insurance company.

4. Advantages • Rate of Return • GICs typically offer a higher rate of return than other relatively low-risk investments, such as money market funds or certificates of deposit. • Moderate Risk • They are backed by the insurer’s contractual obligation. • The risk of nonpayment of interest or principal is very low. • Most insurers are creditworthy.

5. Disadvantages • Lack of Federal Insurance • Unlike some other relatively low-risk investments, GICs are not guaranteed or insured by the Treasury or any other government agency. • Despite the term “guaranteed,” they are riskier than any federally insured investment. • Moderate Risk • Although insurance company insolvencies are unusual, in certain instances defaulting insurers have failed to make promised payments of interest or principal. • Credit risk does exist.

6. Tax Implications • Income earned on a guaranteed investment contract and paid into a qualified plan account is not taxed to the participant or the plan until distributions begin. • All of the income attributable to a GIC is fully taxable to the investor at ordinary income tax rates to the extent that a distribution is made from the plan. • Unless the participant elects to roll over part or all of the distribution.

7. Alternatives • Certificates of Deposit (CDs) • Debt instruments issued by commercial banks, savings and loans, and other thrift institutions • Lower return, lower risk • Federally insured • U.S. government bonds, money market funds, or corporate debt instruments • Other options, if offered by the plan, when considering a GIC as a 401(k) investment • Corporate debt should be evaluated for creditworthiness

8. Where and How do I get it? • GICs are issued by most major insurance companies. • Firms wishing to fund 401(k) and other retirement plans should solicit quotes from a number of issuing companies before an investment decision is made.

9. What fees or other costs are involved? • The commissions and fees involved in the issuance of a GIC are likely to vary considerably from one insurance company to another. • A firm wishing to purchase GICs should solicit competitive bids from at least three different insurance companies before making a decision.

10. How do I select the best of its type? • A potential investor or purchaser of GICs should evaluate the current level of interest rates and estimate the likelihood of future interest rate fluctuations. • If rates are considered “high” by historical standards, investors should consider purchasing a non-participating contract and “lock in” the attractive rate. • If rates are considered “low” by historical standards, investors should consider a participating contract.

11. Where can I find out more about it? • Newspapers such as the Wall Street Journal • The WSJ publishes a daily table of rates quoted for GIC contracts. • The table includes an index of GIC rates prepared by the T. Rowe Price organization • Financial Accounting Standards Board Statement No. 97: Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments • Contains the accounting regulations that apply to GIC contracts