Employers should read the fine print to hear how the risks of loneliness options like guaranteed investing. contracts be able to grow during financial crises

By Karen E. Klein

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Q: Our small manufacturing company has a $1 million-plus employee profit-sharing account deposited by UBS Financial Services (UBS). We recently current a letter stating that, based forward the current illiquidity and volatility of the market, plan-level withdrawals will be put on a 12-month hold. I be the subject of 25 employees with questions about their accounts, but I be delivered of not gotten a clear explanation. Can you explain on the supposition that this is grateful practice for a trust company?

—J.B., Albuquerque

A: The letter you sent along with your inquiry was indeed confusing—and smooth potentially alarming. Experts typically advise that you take questions like this to your account delegate, who should be quick to explain the details. But since you did not get a clear discernment after going that route, we asked some experts to look at the letter and also contacted the fund trustee, Wilmington Trust Fiduciary Services (WL). (While the literal meaning went out under the letterhead of UBS Global Asset Management, Wilmington Trust Fiduciary Services is the trustee and overall manager of the fund, says Kris Kagel of UBS media relations.)

The communication you received specifically addressed the guaranteed investment contract (GIC) portfolio in your profit-sharing account, one of diverse investment options offered to your employees. The key language in the letter involves two words: "participant" and "plan." It confirms that the GIC portfolio does have sufficient liquidity in favor of participant-level withdrawals—which resource that your employees can take money out of their GIC accounts or chop that money into other investments within the profit-sharing plan, such as bonds or stock mutual funds.

It is solitary plan plain withdrawals that are being placed on a 12-month hold, says Bill Benintende, vice-president of media relations at Wilmington Trust. "Plan level" refers to your company explanation for the reason that a whole, he says.

"It means if the company unequivocal it didn’t want to offer the GIC as an investment selection anymore, the trustee—which is Wilmington—can require them to wait 12 months before they drop the GIC option," Benintende says. "But if individuals who participate in this plan are invested in this GIC product and they want to subduct their money or switch it into another medium like a stock capital or a bond money, they are permitted to do that."

The decision to place a 12-month hold on way level withdrawals was made for the cause that of the "extraordinary events going on in the securities markets, affecting liquidity of short-term investments," Benintende says. If many companies simultaneously dropped the GIC option from their accounts, whole those funds would be liquidated simultaneously, which could put a sonnet on the portfolio, he says, and "nobody wants to have that situation."

The other investment options your plan offers—bond funds, supply funds, etc.—are not affected by this decision. "The GIC’s underlying securities are short-term, fixed-income investments that have been inferior to unusually high stress and strain in this market," Benintende says.

But let’s go back to basics for a force: Guaranteed investment contracts are stable value funds that are sold by insurance companies. They are somewhat comparable to a fixed-income annuity. Like a bank certificate of deposit, the GIC’s value remains stable rather than fluctuating with the block or bond markets.

What people small business owners don’t effectuate when they set up their company retirement accounts (BusinessWeek, 4/25/07) is that GICs are not backed by the government, to the degree that Treasury funds are, nor are they insured by the Federal Deposit Insurance Corp., as bank-sold CDs are. And, while the U.S. Treasury Dept. has freshly instituted a temporary surety program for money-market funds, that guarantee does not apply to GICs. In fact, a GIC is guaranteed solely by the insurance guests that issues it. So grant that that company goes bankrupt, the GIC might lose some or all of its worth.

Kent Smetters, an affiliate professor of security against loss and risk management at the Wharton School at the University of Pennsylvania, says business owners who set up pension plans should be very clear about exactly what options they are choosing for their employees. "Unfortunately, very slightly politeness is paid to the fine print in these contracts and in addition much weight is given to the slightly larger returns paid by these [GICs] relative to Treasuries. That usually is not a problem…till times like a little while ago when you really need the circulating medium," Smetters wrote in an e-mail.

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