What Is a Guaranteed Investment Contract (GIC)?

A guaranteed investment contract (GIC) is a contract between an insurance company and an investor, typically a pension fund or an employer-sponsored retirement plan, such as a 401(k). The investor agrees to deposit a sum of money with the insurer for a specified period of time, and the insurer promises to pay the investor an agreed-upon interest rate, as well as to return its principal.

Employees who participate in a 401(k) or similar plan often have GICs as one of their investment choices. GICs are sometimes called funding agreements.

How Guaranteed Investment Contracts Work

A GIC works something like a certificate of deposit (CD) from a bank, although GICs are typically purchased by institutions rather than individuals and often come in much higher denominations. Like CDs, GICs are considered a relatively low-risk investment. They also provide a lower rate of return than many other investments.

In retirement plans, GICs typically appeal to risk-averse investors or those who want to balance out their portfolios by putting some of their money into a low-risk account. GICs are often offered to retirement plan participants as part of a stable value fund or similarly named conservative investment option.

Most GICs have either a fixed interest rate or a variable interest rate that adjusts periodically based on a particular index.

What Does ‘Guaranteed’ Mean with a GIC?

The word “guaranteed” in the term “guaranteed investment contract” can be misleading. While the insurance company guarantees that it will pay the agreed-upon interest rate and return the investor’s principal, that guarantee is only as solid as the insurer itself.

When the federal government bailed out the huge insurance company AIG during the 2007–2008 financial crisis, it said one reason was to keep AIG from defaulting on its GICs. As officials of the Federal Reserve Bank of New York later testified, “Pension plans that had placed funds in AIG guaranteed investment contracts, or GICs, which function much like deposits in a bank, would have experienced significant losses, losses that would be passed along to retirees or to others whose aspirations to be retirees would surely have been changed.”

GIC investors also face interest rate risk. Since GICs pay relatively low rates of interest, it can be easy for inflation to outstrip their performance. For example, if a GIC pays 4% annual interest over its 10-year term, but inflation averages 6% during that same period, the purchaser will lose money in terms of purchasing power.

The Bottom Line

Guaranteed investment contracts (GICs) are contracts between an insurance company and an investor, typically a pension fund or an employer-sponsored retirement plan, such as a 401(k). Employees who participate in a 401(k) or similar plan often have GICs as one of their investment choices, sometimes as part of a stable value fund. Because of their low interest rates, GICs are especially susceptible to the risk of inflation.