Section 403(b) of the IRS 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.
Actual Contribution Percentage (ACP)
In a 401k plan this is the result of the average of rations of combined contribuionjs to compensation for both highly compensated employee and non-highly compensated employees. An ACP ratio is calculated for each employee and for the group.
Actual Deferral Percentage (ADP)
The ratio of a plan participant's compensation that is contributed to a 401k plan as an employee elective deferral.
Increase in the value of an investment over time.
Something you own. Examples are cash, accounts receivable, inventory, real estate, and investments.
An attempt to spread your investment risk by dividing your investments into various major asset categories.
Normally, employees must request to enrolled in a retirement plan. With automatic enrollment, all employees are enrolled in a plan unless they specifically request to be excluded.
Common trust fund or mutual fund that maintains a balanced portfolio (50% bonds or preferred stocks and 50% common stocks).
If an employer decides to switch plan vendors or financial institutions, there will usually be a period of time when participant's are not allowed to make changes in their investment selections. Can last up to 60 days.
An increase in the value of a capital asset. If the asset has not been sold, it's "unrealized" capital gain. If the asset is sold, it's a "realized" capital gain. Capital gains can be "short term" (asset held one year or less) or "long term" (over one year)
Provision in some 401k plans where an eligible employee aged 50 or over can make higher annual contributions prior to retirement.
An investment representing ownership in a corporation. Most common investment.
Testing required by the IRS to ensure that the retirement plan is fair to highly compensated and all other employees.
Amount of cash sent to the plan by either the employer or the employee.
Bank or trust company that maintains a retirement plan's assets, it's portfolio or record of them. Provides safekeeping of securities, but not portfolio management.
Portion of salary contributed to a retirement plan. That portion is not subject to tax at the time it's earned.
As opposed to defined contribution, a retirement plan that pays out a specific, predetermined amount to retirees. These plans are guaranteed by the PBGC. Generally, more expensive and complex than defined contribution plans.
As opposed to defined benefit, a retirement plan that pays in regular, set amounts. Less complex and expensive than defined benefit plans.
A tax-deferred transfer of assets from one retirement plan to another plan or IRA. Aka trustee to trustee transfer. No funds are sent to the plan participant.
Generally, tests to determine whether a plan is available to employees in various income levels. Plans must comply with Internal Revenue Service guidelines in order to pass a series of measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test.
Distributions and Withdrawals
Taking money out of your plan.
The practice of spreading risk by investing in a number of securities that have different return patterns over time.
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 from salaries and wages. As opposed to 1099 income such as consulting income.
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.
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.
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.
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.
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.
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.
Highly Compensated Employee
A Highly Compensated Employees (HCE) is an employee who received more than $100,000 (adjusted for inflation) in compensation during the last plan year OR is a 5% owner in the company.
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.
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 process that allows 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.
A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted.
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.)
The degree of ease and certainty of value with which a security can be converted into cash.
Attempting to leave the market entirely during downturns and reinvesting when it heads back up.
Money Market Fund
A common trust fund or mutual fund that aims to pay money market interest rates.
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.
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.
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.
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 government-specified tests.
Non-Highly Compensated Employee (NHCE)
This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.
Non-Qualified Deferred Compensation Plan
A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer's creditors.
Non-Qualified Retirement Plan
A non-qualified retirement plan does not met the requirements of the IRC or ERISA for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods. They are typically used to provide deferred compensation to key personnel.
OTC Over-the-counter Market
Electronic network which trades bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).
Participant Directed Account
A plan that allows participants to select their own investment options. See Participant Directed Investing.
Participant Directed Investing
In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.
PBGC - Pension Benefit Guarantee Corp.
The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.
The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administrator if no other entity is named.
The entity (generally the employer) responsible for establishing and maintaining the plan.
Companies that administer, service and/or sell 401k plans. They are generally employed by the plan sponsor.
The calendar or fiscal year for which plan records are maintained.
This occurs when, upon termination of employment, an employee transfers pension funds from one employer's plan to another without penalty.
The group of individual securities held by a person or an institution.
Price-earnings ratio (P/E)
Market price per share divided by the firm's earnings per share. A measure of how the market currently values the firm's earnings growth and risk prospects.
The original amount of money invested or lent, as distinguished from profits or interest earned on that money.
Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. This includes transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction.
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus.
Qualified Retirement Plan
A qualified retirement plan meets the rules of the Internal Revenue Code (IRC) and the Employee Retirement Income Secuity Act of 1974 (ERISA). Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal.
Real Rate of Return
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.
Required Rate of Return
The rate of return demanded to induce investors to invest in a security.
How much money you make. Consists of income plus capital gains (or losses) relative to investment.
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.
The extent to which an investor will accept risk in the pursuit of a financial reward. The greater an investor's tolerance, the more risk s/he will accept in order to reach their goal.
The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.
An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.
S&P 500 (Standard & Poor's 500 index)
An index of 500 major U.S. corporations. It is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The index tracks industrial, transportation, financial, and utility stocks. The composition of the 500 stocks is flexible and the number of issues in each sector vary.
Salary Reduction Plan (Cash or Deferred Arrangement)
A CODA is a defined contribution plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. They include 401k, 403b and 457 plans.
Savings or Thrift Plan
A defined contribution plan in which participants make contributions on a discretionary basis with limits and to which employers may also contribute, usually on the basis of fully or partially matching participants' contributions. Contributions are commonly made with after-tax earnings.
Socially Responsible Investing
An investment strategy that only purchases securities of individual companies that espouse some form of social responsibility, e.g., "green" funds that target investments reflecting environmental awareness.
Tax Free Rollover
Provision whereby an individual receiving a lump sum distribution from a qualified pension or profit sharing plan can preserve the tax deferred status of these funds by a "rollover" into an IRA or another qualified plan if rolled over within sixty days of receipt.
Unfunded Prior Service Pension Liability
In a defined benefit pension plan, the difference between the actuarially-determined value of the projected future benefit costs (both vested and manifested) and administrative expenses, as well as the unamortized portion of prior benefit costs, under the plan, and the market value of the plan's assets.
Unfunded Vested Pension Liability
In a defined benefit pension plan, the difference between the actuarially-determined value of the vested (non-forfeitable) benefits under the plan, and the market value of the plan's assets.
Value Line Index
The index represents 1,700 companies from the New York and American Stock Exchanges and the over-the-counter market. It is an equal-weighted index, which means each of the 1,700 stocks, regardless of market price or total market value, are weighted equally.
The portion of your retirement plan that you own.
The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401k plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.
Wilshire 5000 Equity Index
A stock market measure comprising 5,000+ equity securities. It is the broadest US stock market index and includes all New York Stock Exchange and American Stock Exchange issues and the Nasdaq Stock Market. It is a capitalization-weighted index.
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.
A curve that shows interest rates at a specific point for all bonds having equal risk but different maturity dates. Usually, government bonds are used to construct such curves.
Yield to Maturity
The rate of return anticipated on a bond if it is held until the maturity date.
A bond bought at a discount to its face value that does not pay interest, but pays face value on maturity. The longer the time between when you purchase the bond and it matures, the deeper the discount. Your earnings on this type of bond is the difference between your purchase price (the discount) and the face value at maturity.