A fee assessed on certain mutual funds or share classes permitted under an SEC rule to help cover the costs of marketing and selling fund shares. “Distribution fees” include fees to compensate brokers and others who sell fund shares, and to pay for advertising, and printing and mailing prospectuses to new investors. “Shareholder Service Fees” are fees that cover the cost of responding to investor inquiries and providing investors with information.
An employer-sponsored retirement savings plan that gives employees a choice of investment options, typically mutual funds. Employees who participate in a traditional 401(k) plan have a portion of their pre-tax salary invested directly in the option or options they choose. These contributions and any earnings from the 401(k) investments are not taxed until they are withdrawn.
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.
Where a person or team, often called the portfolio manager, actively makes investment decisions and initiates buying and selling of securities using analytical research, forecasts, and their own judgment and experience. The opposite of active management is called passive management, better known as “indexing.”
ACTUAL CONTRIBUTION PERCENTAGE (ACP)
In a 401(k)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.
ADMINISTRATION / RECORDKEEPING FEE
Fee for providing recordkeeping and other plan participant administrative type services. For start-up or takeover plans, these fees typically include charges for contacting and processing information from the prior service provider and “matching up” or mapping participant information. Use of this term is not meant to identify any ERISA Section 3(16)(A) obligations.
A written statement issued by the Internal Revenue Service to a volume submitter practitioner or volume submitter mass practitioner as to the acceptability of the form of a specimen plan and any related trust or custodial account under §401(a).
Federal law requires that all ERISA-covered plans with more than 100 participants be audited by an independent auditor. It is also common to refer to a DOL or IRS examination of a plan as a plan audit. Any charge imposed by a service provider in connection with this audit is reflected on Schedule B.
ANNUAL DEFINED CONTRIBUTION LIMIT
The maximum 401k contribution limit that applies to all employee and employer 401k contributions in a calendar year. This limit is the lesser of 100% of the employee’s total pre-tax compensation or a fixed amount that can change annually.
An annual rate of return is the profit or loss on an investment over a one-year period. There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, multiplying it by 12 expresses an annual rate of return. This is often called the annual percentage rate (A.P.R.).
A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.
Increase in the value of an investment over time.
The price a seller is willing to accept for the security; also called the offer price. This price is usually higher than the Bid price.
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.
A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.
AUTOMATIC CONTRIBUTION ARRANGEMENT
A feature in a plan whereby a covered employee’s compensation is reduced by an amount specified in the plan and contributed to the plan on the employee’s behalf unless the employee makes an affirmative election to have a different amount or no amount contributed to the plan. In the case of a 401k plan with an automatic contribution arrangement, the amounts withheld from employees’ compensation are contributed to the plan as elective deferrals and the percentage of compensation contributed is called the default deferral rate.
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.
A plan which automatically increases the percentage of (retirement) funds saved from salary. This type of plan generally features a default or standard contribution escalation rate.
A sales charge, also known as a “deferred sales charge,” investors pay when they redeem (sell) mutual fund shares. Funds generally use these to compensate brokers.
Fee that may be charged each time a participant inquires about his or her balance.
The firm’s financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.
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.
One one-hundredth (.01) of a percentage point. For example, eight percent is equal to 800 basis points.
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.
The price a buyer is willing to pay for a security. This price is usually lower than the Ask price.
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.
BOARD OF DIRECTORS
A group of people elected by shareholders to oversee the management of a corporation
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.
BOOK VALUE PER SHARE
The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.
A fee paid to a broker or other intermediary for executing a trade.
A plan investment option allowing a participant to establish a self-directed brokerage account.
A 401k package which includes all investment, administration, education, and recordkeeping that is sold as one unit for an all-inclusive fee. Bundled services by their nature are priced as a package and cannot be priced on a per service basis. 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.
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.
The right to purchase stock at a specified (exercise) price within a specified time period.
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.
An a capital asset such as common stock. A capital gain may be short-term (one year or less) or long-term (more than one year). The increase in the value of an investment more than the price the investor paid for it. If the asset is sold, the gain is a “realized” capital gain. 401(k) withdraws are not taxed as capital gains but instead are taxed as ordinary income.
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.
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.
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.
Different types of shares issued by a single fund, often referred to as Class A shares, Class B shares, and so on. Each class of a fund holds identical investments and shares the same investment objectives and policies. But each class has different shareholder services with different fees and expenses, and therefore, each class will have different performance results.
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 INVESTMENT FUND
A tax-exempt pooled fund operated by a bank or trust company that commingles the assets of trust accounts for which the bank provides fiduciary services.
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.
Broker’s fee for buying or selling securities.
An investment representing ownership interest in a corporation.
Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.
The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).
A contingent beneficiary stands second-in-line, behind the primary beneficiary, to inherit the assets of a retirement plan.
CONTRACT ADMINISTRATION CHARGE
An omnibus charge for costs of administering the insurance/annuity contract, including costs associated with the maintenance of participant accounts and all investment-related transactions initiated by participants.
CONTRACT TERMINATION CHARGE
A charge to the plan for “surrendering” or “terminating” its insurance/annuity contract prior to the end of a stated time period. The charge typically decreases over time.
A group of trades or businesses (employers) that are related through ownership. A controlled group of employers is either (1) one or more chains of employers connected through ownership with a common parent employer where at least 80% of each employer, other than the common parent, is owned by one or more of the other employers and the common parent owns at least 80% of one or more of the other employers (“parent-subsidiary controlled group”); (2) two or more employers where five or fewer common owners satisfy an 80% common ownership test and a 50% identical ownership test (“brother-sister controlled group”); or (3) three or more employers where each employer is in either a parent-subsidiary controlled group or a brother-sister controlled group and at least one of the employers is the common parent employer in a parent-subsidiary controlled group and is also in a brother-sister controlled group (“combined group”).
The process of changing from one service provider to another.
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.
A distribution of funds from the plan to correct a nondiscrimination test or to correct a contribution in excess of a statutory limitation.
Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities,the greater the risk of credit failure.
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.
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.
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.
Long-term debt divided by stockholders’ equity. The ratio identifies the relationship of debt to ownership interest in the firm’s financial structure. A measure of financial risk.
DEEP DISCOUNT BOND
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.
A failure to repay a plan loan in accordance with the provisions specified in the plan document. The document must identify the events that constitute the failure and the parameters for any grace period.
DEFAULT DEFERRAL RATE
In the case of an automatic contribution arrangement in a 401k plan, the percentage of compensation, specified in the plan, withheld automatically from a covered participant’s compensation (unless the participant elects otherwise) and contributed to the plan as an elective deferral.
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.
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.
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.
The increase of purchasing power due to a general decrease in the prices of goods and services.
Decrease in the value of an investment over time.
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.
A bond that is valued at less than its face amount.
A stockbroker who charges a reduced commission and provides no investment advice.
The interest rate used in discounting future cash flows; also called the “capitalization rate.”
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.
DESIGNATED ROTH CONTRIBUTION
An elective deferral designated as a Roth contribution when contributed to the plan and which is not excludable from gross income.
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 by April 1st the year following the year they turn age 70 1/2.
The costs typically associated with processing paperwork and issuing a check for a distribution of plan assets to a participant. May include the generation of IRS Form 1099R. This fee may apply to hardship and other in-service withdrawals as well as to separation-from-service or retirement distributions.
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.
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 PAYOUT RATIO
Annual dividends per share divided by annual earnings per share.
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.
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.
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.
EARNINGS PER SHARE
The net income of the firm divided by the number of common stock shares outstanding.
Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.
An amount contributed to a 401k plan by an employee. Elective deferrals can be either pre-tax or designated as Roth contributions if the plan has a Roth option.
ELIGIBLE AUTOMATIC CONTRIBUTION ARRANGEMENT
A type of automatic contribution arrangement that may be included in a 401k plan. Under the feature, a participant may elect to receive a one-time distribution of elective deferrals withheld under the automatic contribution arrangement. The arrangement must satisfy a uniformity requirement and a notice requirement.
Any employee who is eligible to participate in and receive benefits from a plan.
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.
ENHANCED MATCHING CONTRIBUTION
A matching contribution under a safe harbor 401k plan that provides each participant with a matching contribution that is greater than the basic matching contribution.
EQUITY RISK PREMIUM
An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.
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.
Employee Retirement Income Security Act or ERISA. This law was passed in 1974 and is a comprehensive package dealing with all areas of pensions and employee benefits, not just 401k plans. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration.
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.
EXCHANGE TRADED FUND (ETF)
An Exchange Traded Fund is essentially a passively managed open ended mutual fund. Similar to stock, each ETF has a ticker and is traded on stock exchange.
The average of a probability distribution of possible returns.
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.
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.
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.
Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.
The stated principal amount of a debt instrument.
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. For example, any person who exercises any discretionary authority or control over the management of a 401k retirement plan or its assets. A fiduciary is to act solely in the interest of plan participants and their beneficiaries.
An accounting period consisting of 12 consecutive months.
A matching contribution that is specifically provided for in the plan document and that must be contributed each year unless and until the plan is amended.
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.
Sales charges incurred when an investment in a mutual fund is made.
A plan under which accruals and/or contributions have ceased but assets are still held for participants and beneficiaries
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.
GENERAL OBLIGATION BOND (GO)
A municipal bond backed by the full faith, credit, and “taxing power” of the issuing unit rather than the revenue from a given project.
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.
The gradual reduction of risk within a portfolio based on the number of years to a target date, achieved by adjusting the allocation of assets to more conservative investments. It is typically used when referring to target-date mutual fund strategies.
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.
An in-service distribution from the plan which is made because the participant has suffered severe financial difficulty or an extraordinary event as defined by the plan document. Go to 401k Hardship Withdrawals for a detailed overview.
HIGHLY COMPENSATED EMPLOYEE
A Highly Compensated Employees (HCE) is one who owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or for the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2012 or 2013), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
HOLDING PERIOD RETURN/YIELD
Income plus price appreciation during a specified time period divided by the cost of the investment
Payment of interest and dividends earned on a fund’s portfolio of securities after operating expenses are deducted.
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.
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.
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.
INDIVIDUALLY MANAGED ACCOUNT
An investment account managed for a single plan.
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.
This is the risk that inflation may undermine the performance of investments and reduce the future real value of any investments after inflation has been taken into consideration.
The loss of purchasing power due to a general rise in the prices of goods and services.
A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans.
- 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.
- In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but most plans prohibit it.
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.
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.
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.
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.
This is the risk that an investment may not generate the desired returns over time, and may even result in the loss of any initial capital invested.
Bond purchased for speculative purposes. They are usually rated “BB” and lower, and they have a higher default risk.
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.)
An employee who at any time during the plan year is meets certain income or ownership criteria.
Economic indicator that changes directions after business conditions have turned around.
Economic indicator that changes direction in advance of general business conditions.
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.
An order placed with a broker to buy or sell at a price as good or better than the specified limit price.
The degree of ease and certainty of value with which a security can be converted into cash.
LOAN MAINTENANCE AND REPAYMENT TRACKING FEE
Fee charged to monitor outstanding loans and repayment schedule.
LOAN ORIGINATION FEE
Fee charged when a plan loan is originally taken.
LOAN PROCESSING FEE
Fee charged to process a plan loan application.
The risk of outliving one’s retirement savings and income.
The distribution, in a single payment, of a participant’s entire vested accrued benefit under the plan (or what remains of the participant’s vested benefit at the time of the single-sum distribution).
Fee charged for the management of pooled investments such as collective investment funds, insurance/annuity products, mutual funds and individually managed accounts.
The use of borrowed money to purchase securities (buying “on margin”).
Number of common stock shares outstanding times share price. Provides a measure of firm size.
An order placed with a broker to buy or sell a security at whatever the price may be when the order is executed.
The volatility of a stock price relative to the overall market or index as indicated by beta.
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.
Attempting to leave the market entirely during downturns and reinvesting when it heads back up.
A master plan is a plan that is made available by a sponsor for adoption by employers and for which a single funding medium is established for use by all adopting employers. A prototype plan is a plan that is made available by a sponsor for adoption by employers and under which a separate funding medium is established for each adopting employer.
Employer contributions that are made on account of elective deferrals or employee after-tax contributions.
The length of time until the principal amount of a bond must be repaid.
A contribution required to be made to a plan in any year in which it is determined to be top-heavy.
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.
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.
The plan document must name one or more fiduciaries (called the “Named Fiduciary”) with the duty and the power under ERISA to control, manage and administer the plan. The Named Fiduciary can be an employee of the plan sponsor or an independent party.
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.
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.
A type of contribution an employer chooses to make to their employee’s retirement plan account regardless of whether the employees makes a contribution to the plan.
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.
A pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.
A transaction involving fewer shares than in a “round” lot, which for most stocks is 100 shares.
A written statement issued by the IRS to a sponsor or master and prototype mass submitter as to the acceptability of the form of a master/prototype plan under §401(a) and, in the case of a master plan, the acceptability of the master trust under §501(a).
A defined contribution plan for which there is no plan sponsor or other plan fiduciary willing to act with respect to the plan.
A security, usually a stock, that has had a sharp rise, usually as a result vigorous buying, making prices too high. This is the opposite of being oversold.
A security, usually a stock (also sometimes a whole market), believed to have declined to an unreasonable level due to vigorous selling. This is the opposite of being overbought.
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).
PAR VALUE (BOND)
The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.
Person who has an account in the plan.
The dollars that employees contribute to their 401k plans.
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.
Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.
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.
A written instrument under which the plan is established and operated.
Anyone who exercises discretionary authority or discretionary control over management or administration of the plan, exercises any authority or control over management or disposition of plan assets, or gives investment advice for a fee or other compensation with respect to assets of the plan.
The entity (generally the employer) responsible for establishing and maintaining the plan.
Someone who has the exclusive authority and discretion to manage and control the assets of the plan. The trustee can be subject to the direction of a named fiduciary and the named fiduciary can appoint one or more investment managers for the plan’s assets.
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.
A bond that is valued at more than its face amount.
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.
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.
Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.
The original amount of money invested or lent, as distinguished from profits or interest earned on that money.
Net earnings after taxes divided by sales. Measures the ability of a firm to generate earnings from sales.
PROFIT SHARING PLAN
A defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.
Computer-based trigger points are established in which large volume trades are indicated. The technique is used by institutional investors.
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. You should always read the prospectus on any mutual fund before investing.
PRUDENT INVESTOR RULE
The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) certain actions can be delegated to other agents and fiduciaries. ERISA [ § 404(a)(1)(C) ] generally follows the approach of the Prudent Investor Rule.
PRUDENT MAN RULE
A rule originally stated in 1830 by the Supreme Judicial Court of Massachusetts in Harvard College v. Amory [ 9 Pick. (Mass.) 446 ], that, in investing, all that can be required of a trustee is that s/he conduct themselves faithfully and exercise a sound discretion and observe how a person of prudence, discretion, and intelligence manage their own affairs not in regard to speculation, but in regard to the permanent disposition of their funds considering probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as a part of state fiduciary law, usually with certain different specifics from state to state.
The right to sell stock at a specified (exercise) price within a specified period of time.
QUALIFIED DEFAULT INVESTMENT ALTERNATIVE (QDIA)
An investment option a plan sponsor may use for 401k plan contributions in the absence of direction from a plan participant.
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)
A judgment, decree or order that creates or recognizes an alternate payee’s (such as former spouse, child, etc.) right to receive all or a portion of a participant’s retirement plan benefits.
A private retirement plan that meets the rules and regulations of the Internal Revenue Service. 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.
Price performance of a stock divided by the price performance of an appropriate index over the same time period. A measure of price trend that indicates how a stock is performing relative to other stocks.
REQUIRED RATE OF RETURN
The rate of return demanded to induce investors to invest in a security.
The percent of earnings retained in the firm for investment purposes.
RETURN ON EQUITY (ROE)
A ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how effect their money is being employed.
Consists of income plus capital gains (or losses) relative to investment.
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.
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.
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.
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.
A 401k feature that allows employees to make elective contributions on an after-tax basis. Withdrawals, generally after age 59½, of any money from the account (including investment gains) are tax-free.
The basic trading block for stocks — usually 100 shares.
SAFE HARBOR 401K
A safe harbor 401k is similar to a traditional 401k plan, but the employer is required to make contributions for each employee. The safe harbor 401k eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401k plans.
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.
A market in which an investor purchases an asset from another investor rather than the issuing corporation. An example is the New York Stock Exchange.
One who studies various industries and companies and provides research reports and valuation reports.
A physical location or organization where securities certificates are deposited and transferred by bookkeeping entry.
A company that provides some type of service to a 401k plan, including managing assets, recordkeeping, providing plan education, and plan administration.
A practice where owners of securities, either directly or indirectly, lend their securities to (primarily) brokerage firms for a fee. The borrower pledges either cash, securities or a letter of credit to protect the lender. Securities are borrowed by cover fails of deliveries or short sales, provide proper denominations, and enable brokerage firms to engage in arbitrage trading activities.
A market transaction in which an investor sells borrowed securities in anticipation of a price decline. If the seller can buy back that stock later at a lower price, a profit results. If the price rises, however, a loss results.
SINKING FUND PROVISION
A means of repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.
SOCIALLY RESPONSIBLE INVESTING
An investments 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.
The purchase of research materials from brokerage firms and paid for by commissions (or part of the commissions) generated by securities transactions of trust accounts. Covered by Section 28(e)(1) of the Securities Exchange Act of 1934. Opposed to this is the purchase of materials by “hard dollars”, which is when payment is made by the trust department itself, typically by issuing a check.
Summary Plan Description for ERISA employee benefit plans. ERISA requires a Summary Plan Description (SPD) be distributed to each plan participant and to each beneficiary receiving benefits under the plan as follows: For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.
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.
Costs associated with providing materials to educate employees about the plan, and enrolling employees in the plan. This may be part of, or included in, the education programs. There may be a one-time cost associated with implementing a new plan, as well as ongoing enrollment costs.
A dividend paid in additional shares of stock rather than in cash.
The division of a company’s existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held and the price would be split in half.
An agent who for a commission handles the public’s orders to buy and sell securities.
STOCKHOLDERS’ EQUITY (BOOK VALUE)
An indication of how well the firm used reinvested earnings to generate additional earnings.
An order placed with a broker to buy or sell at a specified price or better after a given stop price has been reached or passed.
An order placed with a broker to buy or sell when a certain price is reached; designed to limit an investor’s loss on a security position.
SUMMARY PLAN DESCRIPTION
A target benefit plan is a defined contribution plan that acts much more like a defined benefit plan. Contributions are set for each year, but are variable based on the age of the employee. This allows older employees to receive similarly sized pensions as younger employees despite having less time for investments to grow.
A mutual fund type that automatically reduces the risk within its portfolio by resetting the asset mix between stocks, bonds and cash to be more conservative based on the number of years to a target date.
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.
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.
A party hired by a plan or its fiduciaries to aid in performing management and/or recordkeeping functions on behalf of the plan.
TOTAL DEBT TO TOTAL ASSETS
Short-term and long-term debt divided by total assets of the firm. A measure of a company’s financial risk that indicates how much of the assets of the firm have been financed by debt.
The spread of prices that a stock normally sells within.
Costs incurred buying or selling securities. These include brokers’ commissions and dealers’ spreads (the difference between the price the dealer paid for a security and for which he can sell it).
Short-term debt security issued by the federal government for periods of one year or less.
Longer-term debt security issued by the federal government for a period of seven years or longer.
Longer-term debt security issued by the federal government for a period of one to seven years.
A plan that permits a fund to pay some or all of the costs of distributing its shares to the public. Some of these plans provide for payment of specific expenses, such as advertising, sales literature and dealer incentives. Others are simply intended to protect the fund against possible claims that certain operating expenses, such as administrative or advisory costs, constitute indirect forms of distribution expenses. Both load and no-load funds may adopt 12(b)1 plans.
A fiduciary relationship in which one person (the trustee) is the holder of the legal title to property (the trust property) subject to an equitable obligation (an obligation enforceable in a court of equity) to keep or use the property for the benefit of another person (the beneficiary).
Fees charged by the individual, bank or trust company with fiduciary responsibility for holding plan 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.
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.
The process of determining the current worth of an asset.
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 possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.
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.
VOLUME SUBMITTER PLAN
A type of individually-designed retirement plan that has been pre-approved by the IRS.
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.
A special type of brokerage arrangement where the investors place their funds and pays an annual fee for investment management services. All costs are “wrapped” into this one fee including all administrative fees, commission costs, management fees, etc.
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.
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 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.