Glossary of Retirement Plan Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Accrued Interest-The amount credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the security's price plus the accrued interest.

Actual Contribution Percentage (ACP) - In a 401k plan, this is the result of the average of ratios of combined contributions to compensation for both highly compensated and non-highly compensated employees. Each employee's ratio is calculated and then averaged for the group.

Actual Deferral Percentage (ADP) - This is the proportion of a plan participant's compensation that is contributed to a 401k plan as an employee elective deferral. Annuity - A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

Appreciation - Increase in the value of an investment over time. Asset allocation - Dividing your investment portfolio among the major asset categories. The most important decision you will make.

Asset Allocation Fund - A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Asset - A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

Automatic Enrollment - The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.

Balance sheet - The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.

Balanced Fund - A common trust fund or mutual fund that maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.

Beta - A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

Blackout Period - When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days.

Bond - A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Bundled Plan - A 401k package which includes all investment, administration, education, and recordkeeping that is sold as one unit. This is in contrast to a basic 401k plan in which the plan sponsor can individually hire each component provider separately. Business and industry risk - Uncertainty of an investment's return due to a fall-off in business that is firm-related or industry-wide.

Cash Balance Plan - A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest. The plan provides the benefits in the form of a lump-sum distribution or annuity.

Cash or Deferred Arrangement (CODA) - See Salary Reduction Plan.

Capital gain - An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year).

Catch-up Provision - A provision found in some 401k plans that allows an eligible employee who are at least age 50 to make higher annual contributions in the years prior to retirement.

Certificate of Deposit - A bank deposit that pays a specified rate of interest for a certain period of time.

Churning - The unethical and excessive trading of a client account in order to generate commissions for a broker, but which may not in the best interests of the client. Not only does the client pay high commissions, they also gets stuck with a high tax bills due to the short-term holding of assets.

Cliff Vesting - A 401k plan with "Cliff Vesting" vests 100% of employer contributions after a specified number of years of service. After three years of service, benefits must be fully vested.

Collective Trust Fund - Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.

Commission - Broker's fee for buying or selling securities.

Common Stock - An investment representing ownership interest in a corporation.

Compliance testing - Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.

Compounding - The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

Conversion premium - The amount, expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.

Current yield - Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

Custodian - The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities, but has no role in portfolio management.

Cyclical industry - An industry, such as automobiles, whose performance is closely tied to the condition of the general economy. The company (and their stock) do well during good economic times, and not as well during poor economic times.

Deemed IRA - The "Deemed IRA" (also called a "Sidecar IRA") was part of "The Economic Growth and Tax Reconciliation Act of 2001" (EGTRRA), although the concept has been around since the early 1980's. Basically, if your 401k plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a "Deemed IRA" which is a separate account established under the plan.

Default risk - The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

Defined benefit - A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Defined benefit plans are guaranteed by PBGC.

Defined contribution - A defined contribution plan does not promise a specific benefit at retirement, but does provide regular, set contributions to a pension fund. Defined contribution plans tend to be less expensive than defined benefit plans.

Deflation - The increase of purchasing power due to a general decrease in the prices of goods and services.

Depreciation - Decrease in the value of an investment over time.

Direct Rollover - A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a "trustee to trustee" transfer. The transfer is made without any funds being sent directly to the plan participant.

Discount Rate - The interest rate used in discounting future cash flows; also called the "capitalization rate."

Discrimination Testing - All tax qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, every tax qualified retirement plan (like a 401k) must pass a series of numerical measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test. Typically, doing these tests is called discrimination testing. Distributions and withdrawals - When money is withdrawn from a 401k plan, the withdrawal is referred to as a distribution. 401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.

Diversification - The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Dividend - Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation's directors decide to retain earnings to invest in business operations.

Dividend yield - Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.

Dollar-Cost Averaging - A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased. Dow Jones Industrial Average (DJIA) - Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

Earnings multiplier - An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.

Employer matching contribution - The amount, if any, that the employer contributes to the employee's 401k account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.

Employer discretionary contributions - Some employers also make an additional contribution at plan-year end in the form of increased matching contributions and/or a profit sharing contribution. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis.

Equity risk premium - An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

Equities - Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.

ERISA - Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.

Excess returns - Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

Expected return - The average of a probability distribution of possible returns.

Expense Ratio - The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.

401k Plan - A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401k plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401k plan carries many unique advantages for both employer and employee.

403(b) Plan - SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares.

404(c) - Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.

Fiduciary - An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. The relationship between a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, a trustee and a beneficiary, a person who exercises discretionary control or authority over management of a benefit plan, each is an example of fiduciary relationship.

Fiscal Year - An accounting period consisting of 12 consecutive months. Fixed-Income Securities - Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times. Public and private bonds, government securities, and the 401k's guaranteed accounts, are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

Fundamental analysis - This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.

GNMA (Ginnie Mae) - Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

Going public - Selling privately held shares to new investors for the first time. Gross domestic product (GDP) - A measure of output from United States factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets.

Guaranteed investment (interest) contract (GIC) - Debt instrument sold in large denominations issued by Insurance Companies and often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk. The company issuing the GIC makes the guarantee, not the U.S. Government.

Highly Compensated Employee - A Highly Compensated Employees (HCE) is an employee who received more than $100,000 ($95,000 in 2005) in compensation during the last plan year OR is a 5% owner in the company.

Income Dividend - Payment of interest and dividends earned on a fund's portfolio of securities after operating expenses are deducted.

Income Fund - A common trust fund or mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index Fund - A common trust fund or mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard & Poor's 500-stock index.

Individual Retirement Account (IRA) - A personal, tax-sheltered retirement account available to wage earners not covered by a company retirement plan or, if covered, meet certain income limitations.

Individual Retirement Account (IRA) Rollover - A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to "roll-over" into, or invest that sum in, an IRA. IRA funds can be "rolled-over" from one investment to another.

Income statement - The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss. Index - A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.

Inflation risk - Uncertainty over the future real (after-inflation) value of your investment.

Inflation - The loss of purchasing power due to a general rise in the prices of goods and services.

In-service Withdrawal - A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans. o In-service withdrawals of elective deferrals (employee salary reduction contributions) are prohibited by law prior to age 59 1/2. While allowed by law after that age, most plans do not allow it. o In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but most plans prohibit it.

Insider trading - Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.

Integration - A pension design tool in which contributions reflect the existence of Social Security benefits. In this process, FICA taxes are considered part of the contribution to the pension fund. Since Social Security provides a greater percentage benefit to lower paid employees, integration allows the company to increase contributions to higher paid employees.

Interest - What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other form of IOU.

Investment adviser - A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

Junk bond - Bond purchased for speculative purposes. They are usually rated "BB" and lower, and they have a higher default risk.

Keogh Plan - A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares. (Also know as H.R. 10 Plans.)

Lagging indicator - Economic indicator that changes directions after business conditions have turned around.

Leading indicator - Economic indicator that changes direction in advance of general business conditions.

Lifestyle Fund - A mutual fund that maintains an asset allocation based on the expected retirement age of the investor; generally, the investor's portfolio will be shifted into less-risky assets as s/he grows older, or closer to the time when s/he wants to withdraw his investment.

Liquidity - The degree of ease and certainty of value with which a security can be converted into cash.

Market sentiment - The feeling, sentiment, or tone of a market. This is usually shown by the activity or price movement of the securities represented within the market. For example, a bullish market sentiment would be indicated by rising prices and strong demand for securities, while a bearish sentiment would be indicated by falling prices and a lack of demand for securities.

Market timing - Attempting to leave the market entirely during downturns and reinvesting when it heads back up.

Maturity - The length of time until the principal amount of a bond must be repaid.

Money Market Fund - A common trust fund or mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including bank certificates of deposit, commercial paper, U.S. government securities and repurchase agreements. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety.

Money Purchase Pension Plan (MPPP) - A defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.

Mutual Fund - An open-end investment company that buys back or redeems its shares at current net asset value. Most mutual funds continuously offer new shares to investors.

NASDAQ - National Association of Securities Dealers Automated Quotations System. This is a computerized system that provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.

Net Asset Value (NAV) - The current market worth of a mutual fund share. Calculated daily by taking the funds total assets securities, cash and any accrued earnings deducting liabilities, and dividing the remainder by the number of shares outstanding.

Non-discrimination Rules - Rules denying an employer, employee or both the benefit of tax advantages if the plan discriminates in favor of highly compensated or key employees as demonstrated by gover