In stable value investing, GICs and wraps are essentially two of several types of investment contracts that are used to help deliver to participants the attractive stable value characteristics of low return volatility with returns that have exceed those of money market investments over time.*
A guaranteed investment contract, or GIC, is a stable value investment contract issued by an insurance company that usually pays a specified rate of return for a specific period of time, guarantees principal and accumulated interest (i.e., offers book value accounting), and is benefit responsive to qualified participant withdrawals. These contracts, which are also known as guaranteed insurance contracts, may be backed by either an issuer’s general account assets, or by separate account assets which are segregated from the general account and are solely for the beneficial interest of the participants in a specific separate account. In all cases, the insurance company owns the invested assets and the obligation to participants is ultimately backed by the full financial strength and credit of the issuer.
A wrap contract is structurally different than a GIC but seeks to provide the same stable value benefits to participants. The key difference between a GIC and a wrap contract is that under a wrap contract the associated invested assets are usually owned outright by the plan in a synthetic GIC structure or segregated in the plan's name in an insurance separate account wrap. This split structure allows decisions such as the selection of the wrap issuer to be made separately from the selection of an investment manager’s services for the investment of the associated assets. To support the book value guarantee made to participants, this structure relies on both the value of the associated assets and the financial backing of the wrap issuer. Wrap contracts can be issued by banks and insurance companies.
The important concept is that stable value investment options use investment contracts to help deliver the unique benefits for which stable value is known: capital preservation, liquidity, and steady, positive returns that have exceeded money market investments over time.*
*Past performance is not a guarantee of future results.