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Life Health > Life Insurance

GICs Offer Shelter Amid Market Volatility

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The strong performance of stocks in the 1990s left a majority of 401(k) plan advisors and participants leaning toward stocks and stock funds, away from guaranteed investment contracts and other stable value options.

The latest complete figures available show that, in 1999, 401(k) plans had invested only 10% of plan balances in GICs, and 53% in equity securities, according to the Employee Benefit Research Institute, Washington.

Today, attitudes toward GICs may be starting to change.

Peter Bowles, president of Fiduciary Capital Management Inc., Woodbury, Conn., sees two factors helping sales of GICs: gray hair and the Federal Reserve Board.

“As the baby boomers are beginning to approach retirement, they are looking for stable value funds,” Bowles says.

Meanwhile, a combination of Fed rate cuts and market volatility have also added to GICs appeal, Bowles says.

The spreadthe difference between the yield rate on Treasury bonds and the interest rate paid by GICshas been widening.

“Consequently, the GIC yield curve became more positively sloped, with the difference between three- and 10-year contracts increasing to 132 basis points, compared to 88 basis points at the end of first quarter,” Bowles says.

For the second quarter, spreads on five-year contracts are about 139 basis points, Bowles adds.

The Sept. 11 terrorist attacks may have accelerated the shift toward GICs and other stable value investments.

When U.S. equity markets reopened after the attacks, “money primarily flowed out of large U.S. equities on Monday, and into the most conservative asset class generally available to 401(k) participantsGIC/stable value,” says Lori Lucas, a defined contribution consultant with Hewitt Associates L.L.C., Lincolnshire, Ill., a benefits consulting firm.

“Sept. 17s [market] activity was far from the norm, but the fact remains that, even before the events of the previous weeks, participants have been allowing their portfolios to grow increasingly conservative as a function of the prolonged market decline,” Lucas says.

However, Bowles is cautious about forecasting the long-term effects the Sept 11 attacks will have on the GIC market.

“The Fed is starting to offer more debt,” Bowles says. “In doing so, it will likely drive yields on Treasury bonds up. However, from the relative value point of view, GICs will remain attractive to investors.”

The effects of the Sept. 11 attacks on life insurers, the main issuers of GICS, will not hurt GICs, according to Bowles.

Some have wondered about the effects of the attacks on the stability of the life insurers involved.

But “the impact of the [Sept. 11] catastrophe is very broadly spread and has been mostly on property-casualty insurers,” Bowles says. “The feedback we have gathered indicates that the disaster has had a relatively minor impact on life insurers that issue GICs.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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