Q What's your opinion on the relative safety of guaranteed investment contracts. I know these are not FDIC insured. But compared to bonds or equities in the event of a catastrophic economic meltdown, would these contracts reflect a loss rate based on the failures of the underlying banks and insurance companies? In the 2008 crash, these GIC's were safe and suffered no losses. If a larger crash, maybe not so?
PATRICK, WHITE BEAR LAKE
A To cut to the chase, I think there is reasonable safety in a well-diversified portfolio of guaranteed investment contracts, or GICs. It isn't zero risk, of course. Yet there are layers of regulatory and investment protection that are reassuring even in these financially unsettling times.
In essence, GICs are a subset of what is now better known as stable value funds. Traditional GICs were a bond-like security issued by highly rated insurance companies in the emerging defined-contribution pension business -- really the 401(k). The lure for investors was that the GIC earned a rate of interest typically greater than money market funds without the volatility of a bond or bond fund. The real risk of owning a GIC was that the guarantee was only as good as the financial strength of the insurance company or underwriter.
In the 1990s, that guarantee became suspect when a number of high-profile insurance companies that issued GICs ran into financial trouble, most notably Executive Life Insurance, Mutual Benefit Life and Confederation Life Insurance. In almost all cases the GIC holders eventually got their entire principal back or more, although in some cases with a significant delay. GIC investors also faced some tense moments when the insurance giant AIG teetered. Its GIC business is one reason regulators cited for essentially nationalizing the company during the depths of the financial crisis.
The GIC/stable value products have become far more diversified (and complicated) as companies with 401(k)s insisted on greater protections. Traditional GICs now comprise about 5 percent of the stable-value market with the remainder of the funds made up of short-term, high-quality government and corporate bonds wrapped in an insurance-type contract that backs the principal value.
Here's my bottom line: The old investment adage holds -- don't put all your retirement money eggs in any one GIC/stable value basket. Make sure your retirement portfolio is well-diversified.
Chris Farrell is economics editor for "Marketplace Money." Send your questions to email@example.com.