 |
|
 |
||||||||||
|
|
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
A
Active Participants
Eligible individuals who have hours of service and make contributions to a
retirement plan.
Actual Contribution Percentage (ACP)
One of the calculations performed when testing 401(k) plans for
nondiscrimination. It is the average of the ratios of aggregate contributions
(employer matching and employee after-tax contributions) to compensation. It is
figured for two groups separately: highly compensated employees and non-highly
compensated employees. The ratio for each employee is calculated, and then it
is averaged for the group.
Actual Deferral Percentage (ADP)
One of the calculations performed when testing 401(k) plans for
nondiscrimination. It is the average of the ratios of elective contributions
(employee pre-tax deferrals) to compensation. It is figured for two groups
separately: highly compensated employees and non-highly compensated employees.
The ratio for each employee is calculated, and then it is averaged for the
group.
Additional Voluntary Contribution
A contribution to an employer-sponsored retirement plan with money that has
already been taxed. Not all retirement plans allow this type of contribution.
There may be fewer restrictions on early withdrawals of after-tax
contributions.
Adjusted Gross Income (AGI)
The amount of income that is subject to federal income tax. Contributions to
employer-sponsored retirement plans or deductible traditional IRAs reduce your
adjusted gross income, thereby reducing your tax burden.
Adjusted Service Date
The date used to count service towards eligibility and vesting if a rehired
participant with a break in service is given credit for prior services.
Administrator/Plan Administrator
The person or entity charged with the responsibility of administering the terms
(provisions) of the plan.
Adoption Agreement
In a prototype plan, the part containing the options from which an employer may
choose. Options include choices in participation requirements, vesting
schedules and allocation formulas.
Affiliated Service Group
A group of two or more related organizations that are treated, for various
employee benefit requirements, as a single employer. Employees of these
affiliates are treated as though they are employed by a single employer to
determine plan qualification.
After-Tax Contributions
A contribution to an employer-sponsored retirement plan or IRA with money that
has already been taxed. Not all employer-sponsored retirement plans allow this
type of contribution. There may be fewer restrictions on early withdrawals of
after-tax contributions. Roth IRAs and non-deductible Traditional IRAs only
allow after-tax contributions.
After-Tax Withdrawal
Distribution of funds that were made on an after-tax basis.
Age 59½ Withdrawal
Distribution of pre-tax funds after a participant reaches age 59½ if permitted
under the terms of the plan document.
Age 70½ Withdrawal
Distribution of account funds that is required once a participant reaches age
70½.
Age-Weighted
Plan in which contributions are allocated to participants on a basis that
considers both age and compensation.
Aggressive Growth Fund
A type of mutual fund that invests in less-established companies and takes on a
high level of investment risk with the aim of achieving high growth (increases
in prices of stocks in the fund). Compare to fixed-income or value funds.
Alienation
Assignment of benefits; the voluntary partition of a participant's vested
account balance between a participant and spouse in a qualified domestic
relations order. With that single exception, ERISA generally prohibits
alienation of a participant's benefits, including bankruptcy circumstances.
Allocation
Distribution of your investment funds among different investment categories,
called asset classes (stocks, bonds, etc.). See asset allocation.
Alternate Payee
Someone, other than the participant, who is receiving a payment under the plan.
Under a Qualified Domestic Relations Order, the person who the court orders to
receive a portion of a participant's account.
Amendment
Changes made to an existing plan.
Annual Addition
Under a profit-sharing plan, and other plans that use individual account
balances, it is the contribution made to a participant's account. An annual
addition includes employer and employee (participant) contributions, and
forfeitures under a formula provided by federal law.
Annual Gross Payroll
Total payroll amount of the plan sponsor as of its most recent plan year-end.
Annual Plan Contributions
Total assets contributed to the plan - both participant and employer
contributions - as of the most recent plan year-end.
Annual Report (Employee Benefit Plans)
The employee or plan administrator is required to file an annual information
return with the IRS regarding the qualification, financial condition and
operations of any funded deferred compensation plan.
Annualized Return
The return on an investment, converted to a yearly rate. For example, a mutual
fund that had a 10 percent annualized return over the last five years would
have returned an average of 10 percent each year on the original investment,
even if actual returns varied from year to year. Annualized return may or may
not reflect compounding.
Annuity
A contract, usually with an insurance company, that guarantees the investor or
"annuitant" a fixed payment at least equal to her original investment. Most
annuities are paid out at retirement. Fixed annuities guarantee a certain
payment amount, while the payout for variable annuities depends on how the
money is invested by the individual. Contributions to an annuity are made after
taxes, but all capital in the annuity grows tax-deferred, similar to
employer-sponsored retirement plans or IRAs.
Annuity Period
The time during which annuity assets are sold to make payments to annuitants,
or investors. Also referred to as the payout or liquidation period.
Appreciation
The increase in value of an asset.
Asset
Money, or something worth real money, held by an individual or a company.
Examples include cash in a bank account, stocks, bonds, mutual funds,
retirement accounts and real estate.
Asset Allocation
The division of assets among different types of investments (called asset
classes) such as stocks, bonds, cash and so on, in order to reduce your
investment risk, while reducing portfolio volatility.
Asset Class
A way of categorizing investments. Stocks, bonds, real estate and cash are all
asset classes. They can also be divided further into subtypes, such as
large-cap stocks, small-cap stocks, corporate bonds, high-yield bonds, etc.
Categorizing investments by asset class helps investors determine whether their
holdings are diversified.
Audit
To examine with the intent to verify.
Auditor
A certified public accountant who examines a company's books according to a set
of procedures and issues a report.
Automated Clearing House (ACH)
Establishment responsible for the electronic transfer of assets between
financial institutions.
Automatic Enrollment
Eligible employees are automatically enrolled in the plan at a predetermined
salary deferral percentage, which they can change before enrollment in the plan
or after. Participants can opt out of automatic enrollment if they so choose.
Automatic Investment Plan
A program that allows an individual to have a set amount electronically
transferred from one account to another at a specified time, such as with a
401(k) or other defined contribution plan.
Automatic Reinvestment Plan
An arrangement in which mutual fund dividends or capital gains are used to
purchase additional shares, rather than being distributed to the investor.
Backdating
Permitting a mutual fund shareholder to use previous purchases of a fund's
shares to qualify for reduced commission charges on subsequent purchases.
Balanced Fund
A type of mutual fund that spreads its investments among stocks and bonds.
Essentially, a balanced fund is a middle-of-the road fund that balances its
portfolio to achieve both moderate income and moderate capital growth.
Basic Contributions
That portion of the employee contributions to which a company match
contribution is assessed.
Basis Point
A value equaling one one-hundredth of a percent (1/100 of 1 percent). Commonly
expressed as 0.01. Basis points are often used to compare bond values or
interest rates. Basis points are also used to describe mutual fund management
fees. If you invested $1,000 in a fund with a management fee of 150 basis
points, 1.5 percent - or $15.00 - of your investment would go toward operating
expenses.
Before-Tax Earned Income
Income earned from your employment before you pay your taxes. Includes
salaries, commissions, wages, tips, self-employment income - any income that
does not come from your savings and investments (that is called unearned
income).
Benchmark
A standard against which something is measured. For mutual fund investing, a
benchmark is a group of securities that are similar or identical to the ones in
the fund. Many benchmarks are indexes, like the S&P 500, Russell 2000, or
NASDAQ Composite. To properly assess a mutual fund's performance, you need to
compare it against the appropriate benchmark.
Beneficiary
Person named by the participant to receive any benefits provided by the plan if
the participant dies.
Beta
A coefficient measuring a stock's relative volatility to a market index, such
as the S&P 500 Index. A manager with a Beta greater than 1.0 is more
volatile than the market, while a manager with a Beta less than 1.0 is less
volatile than the market.
Blackout
A period of time during which participants are not allowed to make changes to
their 401(k) balances. This generally occurs during a conversion to a new
recordkeeper, or when significant changes are being made to the plan. The
blackout gives the providers time to test and validate the new platform and/or
provisions.
Break in Service
Under ERISA, a calendar year or other 12 consecutive month period designated by
the plan during which a plan participant does not complete more than 500 hours
of service. When a break in service occurs, the participant must again meet the
plan's eligibility requirements to participate.
Brokerage Window Account
An investment option offered by some employer-sponsored retirement plans (like
401(k), 403(b) and 457 deferred-compensation plans) to give participants more
investing flexibility. A brokerage window allows the participant to invest
retirement contributions in mutual funds, individual stocks and/or bonds that
are outside the set options offered by the plan. Some plans restrict the
brokerage window to a certain percentage of the participant's balance, or to a
certain type of investment, such as only mutual funds. Participants often pay
an annual maintenance fee for the brokerage window, as well as trading
commissions. Also known as a self-directed account.
Buy-Back Provision
When terminating employees who are no more than 50% vested withdraw their own
contributions and the employer cancels the remainder of the benefits, this
arrangement allows the employees to buy back the forfeited employer
contributions by repaying the withdrawn amounts.
Cafeteria Plan
A tax qualified arrangement under which participants may elect a combination of
various taxable and tax-preferred forms of compensation, often including but
not limited to cash, health insurance, 401(k) plan contributions, life
insurance, child care, and additional vacation days. Also called a flexible
benefit plan or Section 125 plan after the section of the tax code that allows
for the creation of flexible benefit plans.
Capital Accumulation Plan
An employer-sponsored pan in which contributions are made to participants'
individual accounts (a defined contribution account). In U.S. Bureau of Labor
Statistics data, it refers to a plan in which employer contributions may be
withdrawn at the participant's discretion prior to retirement, death,
disability, separation from service, age 59½, or hardship (a defined
contribution style arrangement that is not a qualified retirement plan).
Capital Gain
Profit on the sale of an asset or investment. A realized capital gain occurs
when the sale actually takes place, whereas an unrealized capital gain occurs
when an investment isn't sold, but would create a profit if it were sold.
Capital Gains Distribution
Payment to mutual fund shareholders based on gains from the sale of securities
in the fund's portfolio.
Carryover of Contribution
Created whenever the employer's contribution for a given year exceeded the
maximum allowable deductions for that year. Allows employers to make larger
contributions in earlier, more profitable years.
Carryover of Deduction
Credit that occurs when the employer's contribution for the year was less than
the maximum allowable deduction of 15% covered compensation. It enables
employers to take a larger tax deduction.
Cash or Deferred Arrangement (CODA)
Section 401(k) of the Internal Revenue Code allows employers to offer employees
a choice between receiving compensation and having a contribution made on their
behalf to a qualified plan.
Cash Dividend
Dividend paid in cash to holders of a firm's stock.
Cash-Out
Distribution.
Cash Up Payment
An extra payment a participant must receive if he/she has not taken the minimum
required distribution prior to the required beginning date as dictated for
participants who are over age 70½.
Catch-Up Provision
A provision that allows some participants who are nearing retirement to make
contributions above the usual annual limit if they have not maximized their
contributions in earlier years. Not all participants qualify to make catch-up
contributions.
Certified Financial Planner (CFP)
A professional financial planner who has completed a series of courses and
passed examinations in subjects like insurance, securities, and taxation. The
Financial Planning Association awards this designation after the planner has
achieved a certain level of experience in the field (usually 3-5 years). CFPs
typically work directly with consumers.
Certified Public Accountant (CPA)
An accountant who has passed an extensive series of examinations and coursework
to receive state certification.
Chartered Financial Analyst (CFA)
A financial analyst who has passed three levels of examinations covering
economics, security analysis, portfolio management, financial accounting, and
standards of conduct. This designation is conferred by the Association for
Investment Management and Research. Analysts typically do not deal directly
with consumers.
Chartered Financial Consultant (ChFC)
A professional financial planner who has completed a series of courses and
examinations in economics, insurance, real estate, and tax shelters. The
American College in Bryn Mawr, PA, awards the designation.
Cliff Vesting
A description for a vesting schedule for employer-matching contributions to a
retirement account, in which the employee owns no part of the matching
contribution until a certain amount of time passes. For instance, with a
"three-year cliff" schedule, any matching contribution will become your
property after you have been with the company for three years. During this
period, your company invests your money in the same way as your own
contributions. In 2001, a cliff-vesting schedule cannot exceed five years, but
as of Jan. 1, 2002, that maximum will be reduced to three years.
Clone Fund
A mutual fund created to mimic the investment strategy of a successful existing
fund. Sometimes clone funds are created because managers feel the original
fund's performance is hindered by its size. For instance, large funds often
have trouble buying or selling stock of small companies or companies that have
trading volume limits, because the large fund would need to buy or sell over
the limit in order for the transaction to have an impact on its performance.
The smaller clone fund will have the same goals as the old, bigger fund, but
may buy different securities and have different managers.
Closed-End Investment Company (closed-end mutual fund)
An investment company or mutual fund that issues a limited number of shares and
does not redeem those shares in the same way as a typical (open-ended) mutual
fund. Like other securities, closed-end mutual funds are traded on stock
exchanges. A closed-end fund can trade above or below its net asset value,
unlike open-ended mutual funds. Compare to open-ended fund (or mutual fund).
Code
The Internal Revenue Code of 1986 as amended or replaced.
Collectively Bargained Plan
Plans that are established and maintained pursuant to a collective bargaining
agreement.
Commission
A fee charged by a broker or agent for transacting a trade of securities or
real estate on behalf of a customer.
Common Stock
Stock that has no preference to distributed dividends or other company assets.
Common stock usually conveys voting rights to shareholders, who are residual
owners of the company. Compare to preferred stock.
Common Stock Fund
A mutual fund that limits its investment to shares of common stocks. Also
equity funds, stock funds.
Company Stock
Security in a participant's account which represents the stock of the
company-sponsoring plan.
Compensation
The amount of a participant's taxable and nontaxable wages that is considered
for purposes of a certain employee benefit requirement.
Complete Discontinuance
Complete plan termination and final distribution of plan assets.
Conduit IRA
An IRA used as a holding tank to keep money from an employer-sponsored
retirement plan, such as a 401(k) or 403(b), separate from an IRA that you
contribute to annually. If you keep the money from the employer-sponsored plan
separate, and don't make any new contributions to it, you retain the
possibility of later transferring it to a new employer's retirement plan. For
example, say you changed jobs and your new employer did not offer a 401(k). You
put your money in a conduit IRA. Three years later you change jobs again and
your new employer has a great 401(k). If you haven't made contributions to your
conduit IRA, you can roll the entire balance into your new employer's 401(k),
if it accepts rollovers. Conduit IRAs can also be used to transfer money from a
former employer's 401(k) plan into a new employer's 403(b) plan, since direct
rollovers between these plans are not permitted. Conduit IRAs are sometimes
referred to as "rollover IRAs."
Consumer Price Index (CPI)
A measure of average prices in the U.S. economy. Calculated monthly by the
Bureau of Labor Statistics, it measures inflation (increase in price) or
deflation (decrease in price) both countrywide and in specific regions. The
index measures the cost for a fixed set of products and services bought by the
typical consumer. Used to determine Cost of Living Adjustments.
Contingent Beneficiary
An alternate beneficiary. One whose rights under a contract are dependent upon
the death of the original beneficiary or some other contingency.
Contribution
A payment made by an employee or employer to a qualified plan.
Contribution Carry-Over
This is created whenever annual contributions exceed the maximum allowable
deductions. This carry-over can be deducted in future years in which
contribution payments are less that the maximum deduction.
Contribution Formula
As used in a qualified profit-sharing trust or money purchase pension plan, it
is the formula that spells out when and in what amounts the employer will make
contributions to the trust.
Contribution Limits
The maximum dollar limit on annual additions (employer contributions, certain
employee contributions and forfeitures) for an employee.
Controlled Group
Employees of corporations that are treated as employed by a single employer for
plan qualification purposes. Certain tests must be met to qualify as one of the
three types of control groups which are: 1) the parent-subsidiary controlled
group, 2) the brother-sister controlled group, and 3) the combined group.
Convert/Conversion
The transfer of a plan's recordkeeping function to a new recordkeeper; also
known as an install.
Corporate Bond Fund
An investment company (mutual fund) that invests in long-term corporate bonds
and passes the income on these securities to its shareholders.
Cross-Tested
A test for qualified plans with respect to the equivalent amount of benefits to
determine that the plan does not discriminate in favor of highly compensated
employees.
Cost Basis
Basis is the purchase price of any property including improvements or
depreciation on that property. Basis is used as a baseline for determining
capital gains tax on any investment or property. It is also used to figure tax
deductions. Capital gains taxes are figured as a percentage of the amount over
basis. For example, imagine that you bought $1,000 worth of mutual fund shares
a year ago. You decide to sell those shares and they are now worth $1,200. Your
basis is $1,000, the original price of the shares. You will pay capital gains
taxes on the $200 that is over the basis. Figuring basis can become complex
when you have to include reinvested dividends for a security or multiple
appreciations on a piece of property. A different calculation applies to
inherited property. The basis for that property is not the original purchase
price but the price at the time it was inherited. For example, imagine your
uncle bought several shares of Coca-Cola stock for $100 in the 1950s and gave
those shares to you when he died last year. At that time, the shares were worth
$5,000. Now, those shares have appreciated to $5,400 and you decide to sell
them. Your basis for figuring capital gains taxes is $5,000 (not $100). That
is, you will pay capital gains on the $400 the stock has appreciated since you
owned it (not the $5,300 it appreciated since your uncle first bought it). Same
as basis.
Cost of Living Adjustment (COLA)
An annual adjustment to wages or benefits designed to offset a change in
purchasing power usually due to inflation. A COLA is made for Social Security
Benefits each year, for instance. COLAs are often based on the Consumer Price
Index.
Custodial Account
An account established for the safekeeping of plan assets, but with no
discretion or responsibility for managing those assets.
Custodian
An organization or entity that holds the securities for an individual or other
entity. In the retirement arena, a custodian generally keeps track and holds
the securities for a plan. Typically, a custodian is a financial institution,
like a trust company, bank, insurance company, mutual fund company, transfer
agent or brokerage firm. A custodian is not considered a plan Fiduciary but
does provide services to a plan in a fiduciary-like capacity.
Custom Plan Document
A plan written to accommodate the needs of a single employer; always requires
filing with the IRS and must be maintained by the employer for regulatory
changes.
Death Benefit
The payment made to designated beneficiaries upon the death of a participating
employee.
Deduction
An expenditure that may be legally used to reduce your income taxes. This is
done by subtracting the deductible amount from your total income; the result is
a lower "taxable" income on which your taxes are based. Typical deductions
include contributions to defined-contribution retirement plans and some
traditional IRAs, mortgage interest, unreimbursed business expenses, and
charitable contributions. Also called tax deduction.
Deferral
Pre-Tax contributions made to a 401(k) plan.
Deferral Account
The account of a participant who has terminated employment with the company but
has delayed receiving the proceeds of the account until a later date.
Deferred Compensation
The portion of the participant's total compensation which has been contributed
to the plan.
Deferred Compensation Plan
An employer-sponsored program that allows employees to defer part of their
paycheck toward retirement savings and pay taxes later on that income. These
plans are generally offered to state and local government public employees or
workers at tax-exempt organizations. Those offered to public employees
generally operate similar to 401(k) plans, but deferred compensation plans are
not subject to ERISA regulations. Also known as 457 plan or deferred comp plan.
Defined Benefit
A defined benefit plan pays benefits based on a specific (defined) formula. The
benefit is defined by the terms of the plan. In theory, what you "know" at a
given point is the benefits due, based on that formula (though that may be
easier said than done). Simplistically, it is what has traditionally been
called a "pension" plan. The benefit is generally not expressed as a specific
amount, but as a formula used to calculate that benefit. Typically, benefits
paid will depend on three factors: age, service, and compensation. Benefits
paid may be Social Security benefits, and may or may not be adjusted for
subsequent cost-of-living adjustments, based on the terms of your plan. These
plans consider years of service by the employee, generally providing greater
benefits the longer an employee works for a particular employer.
Defined Contribution
In a defined contribution plan, the amount of the contribution is defined by
the plan rather than the benefit. In other words, you "know" how much goes into
the plan (or at least the formula for determining it), not the benefits that
may eventually be paid out. A defined contribution plan has individual accounts
for each participant in the plan, another key difference from defined benefit
plans. Also, both employer and/or employees may contribute to a DC plan
(employee contributions to defined benefit plans are rare). These contributions
are invested at the direction of the employer (as in most profit-sharing
plans), the employee (as in 401(k) plans) or according to the plan itself
(employee stock ownership plans, or ESOPs). The employee benefits directly from
any investment gains in the individual account -- or suffers from any
investment loss. There is no "insurance" for these benefits, as there is with
defined benefit DB plans.
Deferred Vested
An account that is due to a terminated participant whereby all forfeited
monies, if applicable, have been removed from the account.
Defined Contribution Limit
The maximum contributions and additions that an employer may make on behalf of
a pension plan participant.
DEFRA
Deficit Reduction Act of 1984.
Department of Labor (DOL)
The federal regulatory agency responsible for administering certain provisions
of ERISA. The department issues opinion letters and other pronouncements, and
requires certain information forms to be filed.
Determination Letter
Issued by the office of a district director of the IRS, the letter states
whether or not the submitted plan meets the qualification requirements under
the Internal Revenue Code.
Direct Rollover
A rollover made directly to another qualified plan or an IRA. Direct rollovers
are exempt from mandatory tax withholding.
Direct Transfer
A distribution to an employee made in the form of a direct trustee-to-trustee
transfer from a qualified retirement plan to an eligible retirement plan.
Directed-Trustee
An organization or entity that provides limited trustee services based on the
direction of a plan trustee. In a retirement plan, those services are generally
limited to providing audited trust statements and Forms 1099R and 945 reporting
services. A directed-trustee is not generally involved in making investment
decisions or recommendations for the plan nor do they monitor the plan's assets
for conformance with the investment policy statement.
Disability
Inability to pursue an occupation because of physical or mental impairment.
Discretionary Contribution
An employer contribution made to a 401(k) or profit sharing plan that is
allocated on the basis of compensation or in some manner other than on the
basis of elective contributions.
Discrimination
Discrimination occurs when a plan fails to satisfy one or more
Nondiscrimination Rules.
Discrimination Testing
Testing performed pursuant to the Nondiscrimination Rules to ensure that a plan
sponsor does not provide retirement benefits to Highly Compensated Employees
that are significantly greater than benefits provided to Non Highly Compensated
Employees.
Disqualified, Disqualify
Loss of qualified (tax-favored) status by a plan, generally resulting from
operation of the plan in a manner that is contrary to the provisions of the
plan or that discriminates against rank-and-file employees. A disqualified plan
must disgorge its assets, creating tax consequences for both the sponsoring
company and participants.
Disqualified Person
A person who, because of his or her relationship with the plan (e.g., as a
fiduciary, provider of services, or the plan sponsor) is prohibited from
entering into certain transactions with the plan.
Distribution
The benefit paid to a plan participant.
Diversification
A strategy to minimize investment risk by splitting your money among a range of
investment options, so that if one investment performs poorly your entire
portfolio won't suffer the same fate.
Dividend
A share of a company's net profits distributed by the company to a class of its
stockholders.
Domestic Relations Order (DRO)
Judgment, decree, or court order (including approval of a property settlement
agreement) made pursuant to a state domestic relations law (including a
community property law) that relates to the provision of child support, alimony
payments, or marital property rights to an alternate payee.
Early Distribution Penalty
A 10% penalty assessed on distributions received from a qualified plan before
certain conditions are met (generally before the participant attains age 59 ½).
Early Retirement
Provision made in a retirement plan to allow employees who have met certain
conditions, such as length of service and specified age, to retire prior to
their regularly scheduled retirement age. In general, in case of such early
retirement, the benefits which a participant can expect to receive from the
plan will be less than those offered at full retirement age.
Eligibility
Any employee who is eligible to become a participant in a plan pursuant to the
terms of the plan document.
Eligibility Date
The date an individual becomes eligible to participate in a plan.
Eligible Employees
Those members of a group who have met the eligibility requirements under the
plan.
Emerging Growth Stock
The common stock of a relatively young firm operating in an industry with very
good growth prospects. This kind of stock offers unusually high potential
returns but it is also very risky because the expected growth may not occur.
Emerging Market Stocks
Stock of companies located in developing nations. Politically and economically,
emerging market countries are not considered to have the stability or economic
sophistication associated with developed nations.
Employee Retirement Income Security Act (ERISA)
A 1974 act that protects the retirement income of pension fund participants by
setting standards for eligibility, performance, investment selection, funding
and vesting. ERISA is enforced by the Department of Labor. All 401(k) plans and
some 403(b) plans are governed by ERISA. Other 403(b) and all public-employer
457 deferred-compensation plans are not governed by ERISA.
Employee Stock Ownership Plan (ESOP)
A profit-sharing, stock bonus or money purchase pension plan in which the plan
assets must be invested primarily in stock of the employer (company stock). An
ESOP may borrow from the employer, or use the employer's credit to acquire
company stock (a leveraged ESOP).
Employer Match Contribution (also Company Match Contribution)
Contribution made by an employer to a plan on an employee's behalf when the
employee makes elective or non-elective contributions.
Enrollment
The process by which an eligible employee becomes a participant in the plan.
Entry Date
The date on which an employee joins the plan. Excess aggregate contribution:
The excess of the total amount of employee and matching contributions made on
behalf of highly compensated employees (HCEs) in a plan year over the maximum
allowed under the ACP test.
ERISA
The Employee Retirement Income Security Act of 1974, as amended. This benefits
legislation prescribes minimum standards for private pension plan
administration and investment practices. It also created the Pension Benefit
Guaranty Corporation (PBGC) that insures defined benefit retirement plans. The
following agencies have jurisdiction under ERISA: the IRS for tax qualification
issues; the Department of Labor for fiduciary standards and reporting and
disclosure; the PPCG for insuring defined benefit plans; and the Justice
Department for enforcing criminal violations of ERISA.
Excess Accumulation
During a calendar year, the amount by which an individual's required minimum
distribution exceeds the actual amount. Also called an under distribution, it
is subject to a tax penalty of 50% of the difference between the year's minimum
payment and the payment actually received.
Excess Aggregate Contributions
The amount by which aggregate contributions of Highly Compensated Employees
exceed the maximum amount of such contributions allowed under ACP testing.
Excess Contribution
The amount by which elective contributions of Highly Compensated Employees
exceed the maximum of the elective contributions allowed under ADP testing.
Excess Deferral
Salary deferral made by a participant which is in excess of the limit allowed
per calendar year under Internal Revenue Code section 402(g). The IRS imposes a
15% penalty on the participant unless the excess distribution is a result of
death, a QDRO, distribution of non-taxable contributions or amounts that are
rolled over within 60 days of distribution.
Exchange-Traded Fund
A stock-like security that follows a specific stock index, like the Dow Jones
Industrial Average or the S&P 500, allowing investors to buy and sell the
entire index in a single transaction. Similar to index funds, but can be traded
in real time, unlike most mutual funds. Exchange-traded funds are regulated by
the Securities and Exchange Commission.
Ex-Dividend Date
The first day of trading when the seller, rather than the buyer, of a security
will be entitled to the most recently announced dividend payment.
Expense Ratio
The proportion of assets required to pay annual operating expenses and
management fees of a mutual fund.
401(a) Plan
An employer-sponsored retirement plan that is funded entirely by employer
contributions and/or after-tax contributions by the employee. This type of plan
can be a defined-benefit plan, such as a pension, or a defined-contribution
plan, including money purchase and profit-sharing plans. The name "401(a)"
comes from the section of the tax code that allows tax-deferred savings; 401(a)
plans allow investors to defer taxes on investments until they withdraw money
at retirement. A 401(k) plan is a type of 401(a) plan that lets you make pretax
contributions.
401(k) Plan
Employer-sponsored retirement plan that allows employees to contribute part of
their salary before taxes and defer paying tax on the contributions and
earnings until they withdraw funds at retirement. Employees decide how to
invest their contributions among choices usually selected by the employer. It
is difficult to withdraw money from a 401(k) plan before age 59½ unless you
leave your job. 401(k) plans are governed by ERISA. Specific plans may have
stricter rules and limits laid out in the plan document.
403(b) Plan
A defined-contribution retirement plan available to educators, health care
workers, employees of religious institutions and nonprofit workers. Also known
as tax-sheltered annuities (TSAs) and tax-deferred annuities (TDAs), although
not all 403(b)s require annuity investments. A 403(b)(7) plan allows you to
invest in mutual funds. Some 403(b) plans for educators and nonprofits are
governed by ERISA, but plans for religious institutions are not.
404(c) Regulations
Department of Labor regulations that serve as guidelines for retirement plan
fiduciaries. 404(c) regulations are designed to reduce employer liability by
transferring the responsibility for investment decisions to the employee. For
instance, the regulations suggest that 401(k) plan sponsors should provide at
least three distinct investment options with substantially different
risk/return objectives. The regulations also ask employers to provide employees
with a degree of information about plan features, such as prospectuses of
mutual funds offered in the plan. Compliance is voluntary.
415 Limit
Internal Revenue Code section 415 which provides that the total contribution
(employee and employer) to all defined contribution plans made on behalf of a
participant may not exceed the lesser of 25% of the participant's compensation
or $30,000 (as indexed).
415 Testing
Testing performed to insure that participants have not contributed more than is
permitted under the 415 limit.
457 Plan
An employer-sponsored program that allows employees to defer part of their
paycheck toward retirement savings and pay taxes later on that income. Also
known as deferred-compensation or deferred-comp programs, 457 plans are
generally offered to state and local government public employees or workers at
tax-exempt organizations. Those offered to public employees generally operate
similar to 401(k) plans, but 457 plans are not subject to ERISA regulations.
Fact and Circumstances
A test that determines if a participant qualifies for a hardship withdrawal
based on his/her circumstances. The participant must prove that the money is
not available from any other source, including the reasonable sale of assets,
insurance proceeds or commercial loan.
Family of Funds
A group of mutual funds operated by the same investment management (mutual
fund) company.
Fiduciary
Under ERISA, generally any person who exercises any discretionary authority or
control over the management of a plan or the management or disposition of its
assets or renders investment advice for a fee or other compensation with a
respect to the funds of a plan, or has the authority to do so or has any
discretionary authority or responsibility in the administration of a plan. One
who acts in a capacity of trust and who is accountable for whatever actions may
be construed by the courts as breaching that trust. Fiduciaries must discharge
their duties solely in the interest of the participants and the beneficiaries
of an employee benefit plan. In addition, a fiduciary must act exclusively for
the purpose of providing benefits to participants and beneficiaries and in
defraying reasonable expenses of the plan.
Financial Planner
Investment professional who analyzes an investor's circumstances and prepares a
program to meet the investor's financial objectives.
5% Owner
Individual owning more than a 5% interest in an employer in one of the
following ways: 1) the stock of a corporate employer, 2) the voting power in
stock of a corporate employer or 3) the capital or profits interest of a
noncorporate employer. A 5% owner is a key employee under the Tax Code.
Fixed-Income Security
A security, such as a bond or money market instrument, that pays a specific
interest rate.
Flexible Benefit Plan
A qualified arrangement under which participants may elect a combination of
various taxable and tax-preferred forms of compensation, often including but
not limited to cash, health insurance, 401(k) plan contributions, life
insurance, child care, and additional vacation days. Also called a cafeteria
plan.
Forfeiture
If an employee leaves the service of an organization sponsoring a retirement
plan and the employee is not fully vested in those retirement benefits, the
amount of money not vested is called a forfeiture.
Form 5300
Form used to apply for an Employee Benefit Plan determination letter.
Form 5307
Form filed with the IRS for employers who adopt a standard plan document of a
service provider (also known as a master plan, prototype, regional prototype,
or volume submitter plans) filing for a determination letter on the effect of a
minor plan amendment.
Form 5500
Form which must be filed with the IRS for each year in which a qualified plan
has assets. Form 5500 is filed for plans with 100 or more participants, Form
5500 C or R for those plans with less than 100 participants, and Form 5500 EZ
for qualified plans with less than 2 participants. Plans that qualify for Form
5500 C/R must file 5500 Form C for the first year, and every three years
thereafter. In intervening years those plans may file Form 5500-R.
Form 1099-R
An IRS tax form detailing and reporting any taxable distribution made to a plan
participant.
Frozen Plan
A qualified plan that continues to exist even though employer contributions
have been discontinued and benefits are no longer accrued by participants.
Full-Service Broker
A broker who, in addition to executing trades, offers investment advice, asset
management, financial planning and other services.
Full Time Employees
Employees of an employer who work for 1000 or more hours in a 12 month period.
Full Vesting
A participant is fully vested in his or her account under a plan when the
participant is entitled to receive 100% of the amount of the account at some
time in the future.
Fund of Funds
Investment partnership that invests in a series of other funds. Portfolio will
typically diversify across a variety of investment managers, investment
strategies, and subcategories.
Gap Earnings
Earnings calculated to be refunded on excess contributions. It applies to
earnings after the end of the plan year for which the refunds apply.
Global Fund
A mutual fund that includes both domestic and foreign securities in its
portfolio. Compare to international fund.
Government Plan
A plan established for a state or local government, including a state, a
political subdivision of a state, or any agency or instrumentality of either of
them.
Graded Vesting
A vesting schedule that calls for partial vesting; 20% is required after 3
years of service. The vesting portion is increased 20% each year until it
reaches 100%; this process cannot exceed 7 years.
Graduated Vesting
A vesting schedule that provides for increasing levels of vesting with
increasing length of service, until full vesting is achieved.
Gross Earnings
Earnings before taxes are withdrawn and deductions are calculated.
Guaranteed Investment Contract (GIC)
Contracts issued by an insurance company or bank promising a fixed interest
rate over a specified period of time. GICs are low-risk investments that
generally offer low returns.
Hardship Suspension
A suspension of contributions which may be imposed on a participant who takes a
hardship withdrawal.
Hardship Withdrawal
A withdrawal of an employee's contributions to a 401(k) plan prior to
retirement at age 55 or attainment of age 59½. A hardship may only be made in
cases of financial emergency provided there are no other sources available to
meet the need; the withdrawal is taxable as an early distribution and subject
to a 10% excise tax.
Highly Compensated Employee (HCE)
In general employee who 1) owned more than 5% of the company, 2) received more
than $85,000 (indexed) in annual compensation, 3) received more than $50,000
(indexed) in annual compensation (and, if elected by the employer, was in the
group consisting of the top 20% of employees based on compensation).
High-Technology Stock
The stock of a company involved in sophisticated technology such as
electronics, computer software, robotics or life sciences.
Hour of Service
Each hour for which an employee is paid or entitled to payment for the
performance of duties for the employer.
HR-10, HR10, Keogh
A qualified retirement plan that covers a self-employed person (though other
employees might also be covered). May include either a defined contribution or
a defined benefit plan.
Immediate Vesting
That form of vesting under which rights to vested benefits are required by a
participant, commencing immediately upon his/her entry into the plan.
Income Fund
A mutual fund whose main objective is to provide consistent income for its
owners. Income funds typically purchase bonds, preferred stocks and common
stocks that pay high dividends. Compare to growth fund or stock.
Income Stock
A stock with a relatively high dividend yield.
Index
1. A statistical composite that measures changes in the economy or in the
financial markets compared with a base year or a previous time period. Indexes
are used as benchmarks to measure the performance of securities or markets.
Common stock indexes are the S&P 500 and the Dow Jones Industrial Average.
The consumer price index is a measure of the economy. 2. To adjust a value
based on movement in another value. For example, Social Security benefits are
indexed to inflation, so as prices rise, Social Security benefits rise.
Index Fund
A mutual fund that holds a portfolio of securities identical or nearly
identical to those comprising a market index, like the S&P 500 in order to
match the performance of that index. Index funds are passively-managed - they
mirror the holdings and design of the index they track and typically have low
administrative expenses and fees.
Individual Enrollment
Eligible employees take action to enroll themselves in the plan and designate
their salary deferral percentage at that time.
Individual Retirement Account (IRA)
A retirement savings program for individuals to which yearly tax deductible
contributions up to a specified limit can be made if certain requirements are
met. Contributions that are tax deductible and earnings are not taxed until
withdrawn. Withdrawal is not permitted, without penalty, until the individual
reaches age 59½.
Individually Designed Plan
An individually designed (or custom-designed) retirement plan is tailored to
meet particular needs. It is based on a legal document drafted specifically to
conform with the employer specifications, unlike a prototype plan that only
allows for customization within a fixed set of choices.
In Kind Distribution
Distribution from 401(k) account plan whereby the securities are registered in
the name of the participant and issued in the form of certificates.
In-Service Distribution
Distribution of retirement benefits received to a plan participant prior to
retirement (and, generally, while still employed). Most in-service
distributions received before age 59-1/2 will incur an additional 10% tax that
applies to distributions from qualified plans, tax-sheltered annuities, and
individual retirement accounts.
Installment
A benefit/series of payments made either monthly, quarterly, or annually to a
participant. Each payment could be in the form of a set amount, percentage of
account balance or calculated based on life expectancy.
Integration
A feature of some qualified retirement plans that coordinates plan benefits or
contributions with Social Security. Social Security benefits are progressive,
i.e., they replace a greater proportion of pre-retirement earnings for lower
earners than for higher earners. To compensate for this benefit tilt, plans may
provide proportionately (as a percentage of compensation) higher pension
benefits or contributions to higher-paid participants than to lower-paid
participants, subject to certain limits. Since the Tax Reform Act of 1986 (TRA
86), integration is referred to as permitted disparity.
Interactive Voice Response (IVR)
Voice response system that provides participant information and allows
participants to initiate certain financial transactions and account maintenance
via a recorded system which is accessed by telephone.
Interest Rate
The yield over time that interest payments represent. For instance, if you
loaned someone $100 for a month and they repaid you $110 when the month ended,
you would earn an interest rate of 10 percent.
Intermediate-Term Bonds
Fixed-income securities with maturities generally ranging from three to ten
years.
Internal Revenue Services(IRS)
Part of the Treasury Department, the IRS is a government agency charged with
the collection of taxes. The income tax code and regulations often affect the
procedures and methods of accounting.
International Bond
A bond of any country.
International Fund
A mutual fund that invests only outside the country in which it is located,
i.e. an international mutual fund based in the United States would only invest
in stocks outside of the United States. Compare to global fund.
Investment Advisor
The individual(s) or organization(s) that provides investment advice to a plan
or Plan Participant for a fee. The investment advisor has either discretionary
authority with regard to the investments of that plan or participant or with
the advice that is relied upon by the participant or plan in making investment
decisions as defined in ERISA, Section 3 (21). Typically an investment advisor
is not an employee of the Plan Sponsor or the trustee but an independent entity
engaged by the plan officials. Retirement plans do not require the use of
investment advisors, but when applicable, the advisor becomes a Fiduciary to
the plan.
Investment Manager
Individual who is responsible for the selection and allocation of investment
securities.
Investment Policy Statement
ERISA requires that all qualified retirement plans invest assets in accordance
with a written funding policy; for most retirement plans, this is called an
Investment Policy Statement (IPS). This statement specifies how the plan is to
be funded, how investment decisions are to be made, and how investments are to
be monitored. Today, many plans fail to establish and/or update and comply with
their IPS. It is the duty of the trustee and other plan Fiduciaries to
establish and ensure compliance with the IPS.
IRC, Code, Internal Revenue Code
Internal Revenue Code of 1986, the basic Federal tax law.
Joint and Survivor Annuity
A qualified joint and survivor annuity is an immediate annuity for the life of
the participant, with a survivor annuity for the life of the participant's
spouse. The amount of the survivor annuity may not be less than 50 percent, nor
more than 100 percent, of the amount of the annuity payable during the time
that the participant and spouse are both alive.
Keogh Plan
A federally approved, defined-contribution retirement program that permits
small-business owners and self-employed workers to set aside savings on a
tax-deferred basis. Keogh plans have higher savings limits and more
administrative requirements than other plans commonly available to these folks.
Key Employee
A participant who, at any time during the plan year or any of the four
preceding years, is or was, 1) an officer earning more than 50% of the annual
limit on contributions 2) one of the 10 employees earning more than the annual
limit and owning the largest interest in the employer 3) a 5% owner of the
employer or 4) a 1% owner earning more than $150,000.
Large-Cap Fund
A mutual fund that contains large-capitalization (large-cap) stocks. Large-cap
stocks are those of big companies with considerable retained earnings and a
large amount of common stock outstanding - typically, over $10 billion.
Large-Cap Growth Stock
Stock of a company with large market capitalization (typically over $10
billion) and a growth bias.
Large-Cap Stock
Stock of a company that has consistent earnings (link to term) and a large
amount of common stock outstanding, typically with a market capitalization of
over $10 billion.
Large-Cap Value Stock
Stock of a company with a large market capitalization (typically over $10
billion) and a value bias.
Leased Employee
An individual who performs services for another person under an arrangement
between the recipient of those services and a third person (the leasing
organization) who is otherwise treated as the individual's employer. The
services performed by an individual for the recipient must be of a type that is
historically performed by employees.
Leveling
Means of correcting a failed nondiscrimination test. The highest contribution
ratios of the Highly Compensated Employees are reduced until the group
percentages fall within acceptable limits.
Life-Cycle Fund
A mutual fund that seeks to tailor its investments to the needs of investors of
a specific age group. For example, a life cycle fund for young workers would
generally be comprised of aggressive investments but would move into more
conservative investments as those workers approached retirement age. These
funds are designed so they can function as the only investment in a portfolio
and are meant to reduce hassle for the individual investor by handling asset
allocation and rebalancing needs. See also profile fund or lifestyle fund.
Life Expectancy
Length of time a person of a given age is expected to live. The period is a
statistical average, based on mortality tables showing rate of death at each
age.
Lifestyle Fund
A mutual fund that seeks to tailor its investments to an investor's risk
tolerance. Lifestyle funds can be based on an investor's chosen risk profile -
for example, conservative, moderate or aggressive. These funds are designed so
that they function as the only investment in a portfolio and are meant to
reduce hassle for the individual investor by handling asset allocation and
rebalancing needs. Also called a profile fund.
Load Fund
A mutual fund with fees above and beyond the expense ratio. A load is
essentially a sales charge.
Loan
If the plan allows, a participant may take a loan from the plan, using the
vested account balance as collateral. These loans may allow a participant to
repay the account with a stipulated interest rate, or repayments may be
credited to the general assets of the plan. Qualified loans normally provide
favorable interest rates for participants (prime + a percent or two), but have
many restrictions regarding size and amortization which prevent the loan
proceeds from being considered as current income or as an in-service
withdrawal.
Loan Default
The converting of a loan balance into a taxable event due to non-payment of the
loan.
Loan Delinquency
The status of a loan after a participant misses a payment.
Loan Repayment
Salary reduction contribution that is utilized to repay a portion of the
principal and interest amount on an outstanding participant loan.
Long-Term Bonds
Bonds with a maturity over 10 years.
Lump-Sum Distribution
Distribution from a qualified retirement plan of a participant's vested balance
within one taxable year. To be considered a qualified lump-sum distribution, it
must be made because of the employee's death, attainment of age 59-1/2,
separation from service, or disability (if self-employed).
Make-Up Match
Company match contribution made to Highly Compensated Employees who have
reached their contribution maximum prior to the close of the plan year. It
compensates for any amount that would have been matched, but was not, had they
spread their match eligible deferral over the course of the plan year.
Managed Account
Investment account that is managed by a professional. Clients of a managed
account are typically charged a management fee - usually a percentage of the
account's value.
Management Fee
The money paid to the managers of an investment company (mutual fund). This fee
covers the manager's salary and the salary of the fund's staff.
Margin Account
Brokerage account that allows the investor to buy securities with money
borrowed from the broker.
Matching Contribution
An incentive that employers may offer their employees to encourage them to
contribute into a retirement plan. If a company offers a matching contribution,
it will generally match part or all of the employee's contribution, up to a
certain percentage of salary. Although they are deposited regularly in
employees' accounts, matching contributions may not belong to employees right
away. In many cases, they vest over time.
Maximum Buyback
The payment of the total amount previously withdrawn from the participant's
account in order to restore forfeited amounts.
Minimum Buyback
The repayment of only the matched savings amount previously withdrawn from a
participant's account in order to restore forfeited amounts.
Minimum Coverage
Minimum number of employees that must be covered by a plan before it can be
tax-qualified. Plan must satisfy either the ratio percentage test or the
average benefit test.
Minimum Distribution
The amount of funds a participant is required to withdraw periodically upon
attaining age 70½. The initial payment must be taken no later than April 1 of
the year following the year in which the participants attains age 70½. The
amount is based on life expectancy. Failure to receive a minimum distribution
will subject the participant to a 50% penalty on the unpaid amount.
Minimum Funding
Minimum amount that must be contributed by an employer that has a defined
benefit, money purchase, or target benefit pension plan. If the employer fails
to meet these minimum standards, in the absence of a waiver from the IRS, an
excise tax will be imposed on the amount of the deficiency.
Minimum Participation
Must be met by employer in order for the plan to be qualified; plan must
benefit at least the lesser of (1) 50 employees, or (2) 40% of all employees.
Minimum participation requirements cannot be satisfied by combining plans of an
employer.
Money Market Fund
A mutual fund that purchases short-term, high-quality securities, such as
Treasury bills, negotiable CDs and commercial paper. Money market funds pay
income to shareholders in the form of extra fund shares (usually priced at $1
each), so they function in much the same way as a bank savings account.
Money Purchase
A defined contribution plan under which the employer's contributions are
mandatory and are usually based on each participant's compensation. Retirement
benefits under the plan are based on the amount in the participant's individual
account at retirement.
Multi-Employer Plan
A pension plan, maintained under a collective bargaining agreement, that covers
the employees of more than one employer. Generally, the various employers are
not financially related but rather are engaged in the same industry.
Multiple Employer Plan
A qualified retirement plan to which more than one employer contributes and
that is not the subject of a collective bargaining agreement.
Municipal Bond
Debt issued by a city, county, state or other political entity. Interest paid
by most municipal bonds is exempt from federal income tax and often from state
and local taxes as well.
Municipal Bond Fund
A mutual fund that invests in municipal bonds and passes through tax-free
income to its shareholders.
Mutual Fund
A portfolio of stock, bonds, and/or cash equivalents which is typically
actively managed. Open-ended mutual funds are typically actively managed; the
portfolio manager buys and sells securities in an attempt to take advantage of
current or expected market conditions. Closed-ended mutual funds hold a fixed
portfolio of securities. An investment company that pools together funds from
individuals and invests those funds into specific securities designe