A guaranteed investment contract (GIC), also referred to as a guaranteed income contract, is a CONTRACT between an INSURANCE company and a pension plan (i.e., 401(K) PLAN) or corporate PROFIT-sharing plan that guarantees a specific rate of return on the invested CAPITAL over the life of the agreement. The insurance company guarantees the rate of return and earns a profit by investing the funds in securities of similar DURATION (time to maturity) as the length of the agreement. For example, with a 10-year, 5-percent GIC, the pension plan will receive, on the employee’s behalf, a 5-percent yield for 10 years. The insurance company will invest in BONDS, MORTGAGEs or other debt securities that mature in 10 years. If the INVESTMENTS yield 7 percent, the insurance company profits by the spread, 2 percent between the guaranteed return and the yield. The insurance company assumes all credit, market, and interest-rate RISKS. Credit or DEFAULT risk is the potential for a borrower to not repay their loan. Market or systematic risk is the risk associated with changing values in all securities in a class. STOCK MARKET risk is measured by the BETA COEFFICIENT, a statistical measure of the variability in a stock’s price relative to the overall variability of stock-market prices. Interest-rate risk is the potential for fixed-interest-rate securities to decline in value if INTEREST RATES rise. The term guaranteed refers to the rate of interest to be paid over the life of the contract, but it does not guarantee repayment of principal (the amount invested). Americans are used to FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) guarantees on bank deposits. The FDIC, a governmentsponsored CORPORATION, guarantees depositors’ savings should the bank fail. Insurance companies are not federally guaranteed. As a group, there have been relatively few defaults among GICs, and even when a GIC has failed, investors got most if not all of their principal returned. As an investment in a RETIREMENT PLAN, GICs are referred to as stable-value ASSETS. GIC yields are almost always higher than money-market funds and similar to bond funds. Because investors are accepting a guaranteed rate, they are taking less risk than if they put their money in stock MUTUAL FUNDS. Stock mutual funds have historically generated higher yields than bonds or other fixedincome securities, but with greater variation in the short run. During the “go-go” years of the stock market during the mid-to-late 1990s, many employees removed their retirement investments from GICs and put them into stock mutual funds. With the decline of the stock market in early 2000, GICs again became popular.