12b-1 fee is an every year marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund’s expense ratio.
A 3(21) Investment Advisor works with you to recommend the investment lineup for your plan, but does not have responsibility over plan investments.
The 3(38) Investment Manager will have responsibility, authority and control to manage the fund lineup. They will acknowledge their fiduciary status in writing.
A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. It gets its name from a section of the U.S. Internal Revenue Code.
The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
From a high level, the sponsor of a 401(k) plan is the entity that establishes retirement plans for a company and its employees. Normally, the 401(k) plan sponsor is the employer itself, a union, or a selected employee of the firm. ERISA also requires the plan sponsor to select an administrator.
The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
The 404a-5 notice discloses certain plan expenses (administration, individual and investment-related) to 401k participants. First required in 2012, its purpose is to help 401k participants make informed plan choices.
Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.
408(b)(2) disclosure is a fee document associated with employer-sponsored retirement plans
The term active management implies that a professional money manager or a team of professionals is tracking the performance of a client’s investment portfolio and regularly making buy, hold, and sell decisions about the assets in it. The goal of the active manager is to outperform the overall market.
Active managers may rely on investment analysis, research, and forecasts as well as their own judgment and experience in making decisions on which assets to buy and sell.
Actual Contribution Percentage (ACP) is a test that companies must conduct to ensure that their 401(k) plans don’t unfairly benefit highly-paid employees at the expense of others.
The Actual Deferral Percentage (ADP) is a test that companies must conduct to ensure that their 401(k) plans don’t unfairly benefit highly-paid employees at the expense of others.
The finance administrator is responsible for performing a variety of financial and administrative duties. They are responsible for strategizing and planning for financial goals by working daily to achieve and maintain the financial health of a organization.
401k adoption agreement is a section of a retirement plan document that allows the employer to choose the provisions that apply to its (employer sponsored) retirement plan.
A newsletter offering financial advice to readers or subscribers. An advisory letter may be broad by discussing macroeconomic trends, or it may offer specific advice on particular sectors of certain markets.
How much you and your employer can contribute for you
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment, a patent or something else.
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.
There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make.
These funds allocate a specific amount to fixed income and equities depending on the fund’s goal. They typically offer income and growth potential in one fund. Most asset allocation mutual funds have a stated target for the amounts invested in fixed income and equities.
Automatic contribution arrangements allow employers to “enroll” eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. The employee may choose to: not contribute to the plan or contribute a different amount.
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 balanced fund is a mutual fund that typically contains a component of stocks and bonds. A mutual fund is a basket of securities in which investors can purchase. Typically, balanced funds stick to a fixed asset allocation of stocks and bonds, such as 70% stocks and 30% bonds. Bonds are debt instruments that usually pay a stable, fixed rate of return.
The investment objective for a balanced mutual fund tends to be a mixture of growth and income, which leads to the balanced nature of the fund. Balanced mutual funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation.
A balanced fund is a type of hybrid fund, which is an investment fund characterized by its diversification among two or more asset classes. The amounts the fund invests into each asset class usually must remain within a set minimum and maximum value.
A benchmark is a standard against which the performance of a security, mutual fund, or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
Benchmarks are indexes created to include multiple securities representing some aspect of the total market. Benchmark indexes have been created across all types of asset classes. In the equity market, the S&P 500 and Dow Jones Industrial Average are two of the most popular large-cap stock benchmarks.
A blackout period is a policy or rule setting a time interval during which certain actions are limited or denied. It is most commonly used to prevent company insiders from trading stock based on insider knowledge.
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.
Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.
A 401K retirement plan that is sold to sponsors as one unit, which includes investment, administration, education and record keeping.
Buy and hold is a passive investment strategy in which an investor buys stocks (or other types of securities such as ETFs) and holds them for a long period regardless of fluctuations in the market. An investor who uses a buy-and-hold strategy actively selects investments but has no concern for short-term price movements and technical indicators.
A cash balance plan is a twist on the traditional pension plan. Like a traditional pension, a cash balance plan provides workers with the option of a lifetime annuity. However, unlike pensions, cash balance plans create an individual account for each covered employee, complete with a specified lump sum. Establishing a cash balance plan offers potential savings for employers.
An increase in the value of a capital asset. If the asset is sold, the gain is a “realized” capital gain.
A catch-up contribution is a type of retirement savings contribution that allows people aged 50 or older to make additional contributions to 401(k) accounts and individual retirement accounts (IRAs). When a catch-up contribution is made, the total contribution will be larger than the standard contribution limit.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the catch-up contribution provision, thus allowing older workers to set aside more earnings for retirement.
Catch up provisions are most common to structures where the limited partner receives 100% of distributions until it achieves some preferred return requirement, at which point the general partner receives 100% of excess cash flow thereafter until some equitable balance between the limited partner and general partner distributions is achieved.
A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Almost all consumer financial institutions offer CDs, although it’s up to each bank which terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies for early withdrawal.
Shopping around is crucial to finding the best CD rates because different financial institutions offer a surprisingly wide range.
Churning is the illegal and unethical practice by a broker of excessively trading assets in a client’s account in order to generate commissions.
While there is no quantitative measure for churning, frequent buying and selling of stocks or any assets that do little to meet the client’s investment objectives may be evidence of churning.
Cliff vesting is the process by which employees earn the right to receive full benefits from their company’s qualified retirement plan account at a specified date, rather than becoming vested gradually over a period of time. The vesting process applies to both qualified retirement plans and pension plans offered to employees.
Investments created by a bank or trust company for employee benefit plans, such as 401k plans, that pool the assets of retirement plans for investment purposes. They are governed by rules and regulations that apply to banks and trust companies instead of being registered with the SEC. These funds are also referred to as collective or commingled trusts.
Common stock is a security that represents ownership in a corporation. Holders of common stock elect the board of directors and vote on corporate policies. This form of equity ownership typically yields higher rates of return long term. However, in the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders, and other debtholders are paid in full. Common stock is reported in the stockholder’s equity section of a company’s balance sheet.
“Compliance testing” refers to a series of IRS-required tests performed after year-end to ensure that a company’s 401(k) plan does not unfairly favor owners and highly compensated employees. Traditionally, compliance testing can be a daunting process for employers.
Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period.
Compounding typically refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest. This phenomenon, which is a direct realization of the time value of money (TMV) concept, is also known as compound interest.
Compound interest works on both assets and liabilities. While compounding boosts the value of an asset more rapidly, it can also increase the amount of money owed on a loan, as interest accumulates on the unpaid principal and previous interest charges.
A contingent beneficiary is specified by an insurance contract holder or retirement account owner as the person or entity receiving proceeds if the primary beneficiary is deceased, unable to be located, or refuses the inheritance at the time the proceeds are to be paid. A contingent beneficiary is entitled to insurance proceeds or retirement assets only if certain predetermined conditions are met at the time of the insured’s death, such as information found in a will.
If your employer offers a 401(k) plan, it can be one of the easiest and most effective ways to save for your retirement. But while a major advantage of 401(k) plans is that they let you put a portion of your pay automatically into your account, there are some limits on how much you can contribute.
Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings vehicles.
Businesses that share common ownership. Depending on the percentage of ownership, companies under a controlled group (common control) must be treated as one company for retirement plan purposes.
Corrective distributions are a headache for plan sponsors and employees alike. Essentially, these refunds mean that your plan has failed testing, and tax deferred money that key employees set aside for retirement has to be returned to them.
A custodian or custodian bank is a financial institution that holds customers’ securities for safekeeping to prevent them from being stolen or lost. The custodian may hold stocks or other assets in electronic or physical form on behalf of their customers.
A Deemed IRA is treated as an individual retirement account (IRA) and allows you to contribute and invest money in a separate account in a retirement plan such as a 457(b) plan.
Default is the failure to repay a debt, including interest or principal, on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments. Individuals, businesses, and even countries can default if they cannot keep up their debt obligations. Default risks are often calculated well in advance by creditors.
the portion of your wages automatically deducted from your paycheck after your automatic enrollment date which is stated in your Guideline enrollment invitation.
the ratio (expressed as a percentage) of the estimated outstanding balance of mortgage payment deferrals divided by the estimated total outstanding balance.
an employer-based program that pays benefits based on factors such as length of employment and salary history. Benefits can be distributed as fixed-monthly payments like an annuity or in one lump-sum payment.
a common workplace retirement plan in which an employee contributes money and the employer typically makes a matching contribution. Two popular types of these plans are 401(k) and 403(b) plans.
Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.
The United States Department of Labor (DOL) is a cabinet-level department of the U.S. federal government, responsible for occupational safety and health, wage and hour standards, unemployment benefits, reemployment services, and occasionally, economic statistics. Many U.S. states also have such departments.
The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. Not accounting for depreciation can greatly affect a company’s profits. Companies can also depreciate long-term assets for both tax and accounting purposes.
the movement of retirement assets from an employer retirement plan or similar plan directly into another retirement plan, such as an IRA.
In order to determine if race or national origin discrimination played a part in the applicant’s rejection or in the treatment the individual received, the advocacy group, many of which are funded by HUD, will send a comparable white or non-Hispanic person to inquire about renting a unit at the same complex.
separate account in a 401(k) or 403(b) plan to which designated Roth contributions are made. Designated Roth contributions are not excluded from gross income and are currently taxed. The plan must separately account for contributions, gains and losses to this account.
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.
The idea is that the positive performance of one area of a portfolio will outweigh the negatives in another.
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.
In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.
The Dow Jones Industrial Average (DJIA), is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and the Nasdaq.
An elective-deferral contribution is made directly from an employee’s salary to his or her employer-sponsored retirement plan such as a 401(k) or 403(b) plan. The employee must authorize the transaction before the contribution can be deducted.
Elective deferrals can be made on a pre-tax or after-tax basis if an employer allows them. The Internal Revenue Service (IRS) establishes limits on how much an employee can defer or contribute to a qualified retirement plan.
Similar to the basic automatic enrollment plan but has specific notice requirements. An EACA can allow automatically enrolled participants to withdraw their contributions within 30 to 90 days of the first contribution.
An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company; this interest takes the form of shares of stock. ESOPs give the sponsoring company—the selling shareholder—and participants various tax benefits, making them qualified plans. Employers often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders.
Employer matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan based on the amount of your annual contribution. Typically, employers match a percentage of employee contributions up to a specific portion of the total salary.
Equity, typically referred to as shareholders’ equity (or owners’ equity for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation. In the case of acquisition, it is the value of company sales minus any liabilities owed by the company not transferred with the sale.
In addition, shareholder equity can represent the book value of a company. Equity can sometimes be offered as payment-in-kind.
Equity can be found on a company’s balance sheet and is one of the most common pieces of data employed by analysts to assess a company’s financial health.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
In general, the Employee Retirement Income Security Act (ERISA) requires that a sponsor of a plan that has 100 or more participants at the beginning of the plan year to engage an independent qualified public accountant to conduct an audit of the plan’s financial statements.
An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
An expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, thereby reducing the return to investors.
A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.
A fiduciary may be responsible for the general well-being of another (a child’s legal guardian), but often the task involves finances; managing the assets of another person, or a group of people, for example. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility.
The Department of Labor (DOL) requires any plan with 100 or more eligible participants to be audited annually. However, the DOL/IRS may conduct an inspection or random audit at any time.
A fiscal year is a one-year period that companies and governments use for financial reporting and budgeting. A fiscal year is most commonly used for accounting purposes to prepare financial statements. Although a fiscal year can start on Jan. 1 and end on Dec. 31, not all fiscal years correspond with the calendar year. For example, universities often begin and end their fiscal years according to the school year.
Knowing a company’s fiscal year is important to corporations and their investors because it allows them to accurately measure revenue and earnings year-over-year. The Internal Revenue Service (IRS) allows companies to be either calendar year or fiscal year taxpayers.
A fixed-income security is an investment that provides a return in the form of fixed periodic interest payments and the eventual return of principal at maturity. Unlike variable-income securities, where payments change based on some underlying measure—such as short-term interest rates—the payments of a fixed-income security are known in advance.
Force to move out by a legal process. synonyms: evict, expel or eject without recourse to legal process.
Forfeiture is the loss of any property without compensation as a result of defaulting on contractual obligations, or as a penalty for illegal conduct. Forfeiture, under the terms of a contract, refers to the requirement by the defaulting party to give up ownership of an asset, or cash flows from an asset, as compensation for the resulting losses to the other party.
When mandated by law, as a punishment for illegal activity or prohibited activities, forfeiture proceedings may be either criminal or civil. The process of forfeiture often involves proceedings in a court of law.
The IRS Form 5500 is an annual report, filed with the U.S. Department of Labor (DOL) that contains information about a 401(k) plan’s financial condition, investments, and operation.
Form ADV is a required submission to the Securities and Exchange Commission (SEC), by a professional investment advisor, which specifies the investment style, assets under management (AUM), and key officers of an advisory firm. Form ADV must be updated annually and made available as public record for companies managing in excess of $25 million.
If past disciplinary action has been taken against the advisor, this must be noted in the first section of a Form ADV. The second section deals with the AUM, investment strategy, fee arrangements, and service offerings of the firm.
A plan under which accruals and/or contributions have ceased but assets are still held for participants and beneficiaries.
A gap analysis is the process companies use to compare their current performance with their desired, expected performance. This analysis is used to determine whether a company is meeting expectations and using its resources effectively.
A gap analysis is the means by which a company can recognize its current state—by measuring time, money, and labor—and compare it to its target state. By defining and analyzing these gaps, the management team can create an action plan to move the organization forward and fill in the performance gaps.
GNMA, the Government National Mortgage Association
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA.
Glide path refers to a formula that defines the asset allocation mix of a target-date fund, based on the number of years to the target date. The glide path creates an asset allocation that typically becomes more conservative (such as, includes more fixed-income assets and fewer equities) as a fund gets closer to the target date.
A target-date fund is a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal (such as retirement), becoming automatically more conservative as time passes. Each family of target-date funds has a different glide path, which determines how the asset mix changes as the target date approaches. Some have a very steep trajectory, becoming dramatically more conservative just a few years before the target date. Others take a more gradual approach.
A guaranteed investment contract (GIC) is an insurance company provision that guarantees a rate of return in exchange for keeping a deposit for a certain period. A GIC appeals to investors as a replacement for a savings account or U.S. Treasury securities, which are government bonds guaranteed by the U.S. government. GICs are also known as funding agreements.
A hardship withdrawal is an emergency removal of funds from a retirement plan, sought in response to what the IRS terms “an immediate and heavy financial need.” This type of special distribution may be allowed without penalty from such plans as a traditional IRA or a 401k, provided the withdrawal meets certain criteria regarding the need for the funds and their amount.
However, even if penalties are waived (notably, the 10% penalty for withdrawals made before age 59½), the withdrawal will still be subject to standard income tax.
A highly compensated employee (HCE) is, according to the Internal Revenue Service, anyone who has done one of the following: (1) Owned more than 5% of the interest in a business at any time during the year or the preceding year, regardless of how much compensation that person earned or received (2) Received compensation from the business of more than $130,000 if the preceding year is 2021 (and more than $135,000 if the year is 2022), and if the employer so chooses, was in the top 20% of employees when ranked by compensation
An investment advisor (also known as a stock broker) is any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of clients’ assets or by way of written publications. The precise definition of the term was established through the Investment Advisers Act of 1940.
An investment advisor with sufficient assets to be registered with the Securities and Exchange Commission (SEC) is known as a Registered Investment Advisor (RIA). Investment advisors are also referred to as “financial advisors” and can alternatively be spelled as “investment advisers” or “financial advisers.”
An income fund is a type of mutual fund or exchange-traded fund (ETF) that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital gains or appreciation. Such funds usually hold a variety of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.
An index is a method to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These could be a broad-based index that captures the entire market, such as the Standard & Poor’s 500 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.
An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.
Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.
An individual retirement account (IRA) is a savings account with tax advantages that individuals can open to save and invest in the long term.
Like a 401(k) account that an employee obtains as a benefit from their employer, an IRA is designed to encourage people to save for retirement. Anyone who has earned income can open an IRA and enjoy the tax benefits these accounts offer.
You can open an IRA through a bank, an investment company, an online brokerage, or a personal broker.
If you move your assets from one tax-deferred or tax-free investment to another, it’s called a rollover. For example, if you move money from one individual retirement account (IRA) to another IRA, or from a qualified retirement plan into an IRA, the transaction is a rollover.
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and prices decline.
A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans. (1) 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. (2) In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but most plans prohibit it.
Insider trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. Insider trading can be either illegal or legal depending on when the insider makes the trade.
Insider trading is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.
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 is the monetary charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR). Interest is the amount of money a lender or financial institution receives for lending out money. Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares.
A key employee is an employee with major ownership and/or decision-making role in the business. Key employees are usually highly compensated either monetarily or with benefits, or both. Key employees may also receive special benefits as an incentive both to join the company and to stay with the company.
A lifestyle fund is an investment fund that manages a diversified portfolio across assets with varying risk levels. These funds determine the best assets for investors based on their risk tolerance, age, and investment goals.
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself.
Longevity risk refers to the chance that life expectancies and actual survival rates exceed expectations or pricing assumptions, resulting in greater-than-anticipated cash flow needs on the part of insurance companies or pension funds.
The risk exists due to the increasing life expectancy trends among policyholders and pensioners and the growing numbers of people reaching retirement age. The trends can result in payout levels that are higher than what a company or fund had originally accounted for. The types of plans exposed to the highest levels of longevity risk are defined-benefit pension plans and annuities, which sometimes guarantee lifetime benefits for policyholders.
A lump-sum payment is an often large sum that is paid in one single payment instead of broken up into installments. It is also known as a bullet repayment when dealing with a loan. They are sometimes associated with pension plans and other retirement vehicles, such as 401(k) accounts, where retirees accept a smaller upfront lump-sum payment rather than a larger sum paid out over time. These are often paid out in the event of debentures.
In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. An investor can create credit risk if they borrow cash from the broker to buy financial instruments, borrow financial instruments to sell them short, or enter into a derivative contract.
Buying on margin occurs when an investor buys an asset by borrowing the balance from a broker. Buying on margin refers to the initial payment made to the broker for the asset; the investor uses the marginable securities in their brokerage account as collateral.
In a general business context, the margin is the difference between a product or service’s selling price and the cost of production, or the ratio of profit to revenue. Margin can also refer to the portion of the interest rate on an adjustable-rate mortgage (ARM) added to the adjustment-index rate.
Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.
Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. In broad terms, rising prices indicate bullish market sentiment, while falling prices indicate bearish market sentiment.
Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods. If investors can predict when the market will go up and down, they can make trades to turn that market move into a profit.
Employer contributions that are made on account of elective deferrals or employee after-tax contributions.
A contribution required to be made to a plan in any year in which it is determined to be top-heavy.
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.
A money purchase plan is a type of retirement plan in which an employer must add a certain percentage of an employee’s earnings every year. Employees may also be required to contribute as well. Yearly contributions cannot exceed a set amount each year.
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.
Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for “National Association of Securities Dealers Automated Quotations”—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA)—Nasdaq was created as a site where investors could trade securities on a computerized, speedy, and transparent system.
Net Asset Value (NAV) The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), the NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded (invested or redeemed).
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.
This group of employees is determined on the basis of compensation or ownership interest.
A plan in which the assets of certain employees (usually Highly-Compensated Employees) are deferred until a later time, based on the terms of the plan. These plans are not subject to the coverage and nondiscrimination requirements that apply to Qualified Plans.
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 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.
An employee who is eligible to either make contributions to the retirement plan or to share in employer contributions to the plan.
The dollars that employees contribute to their 401k plans.
A plan that allows participants to select their own investment options.
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.
the percentage of the population that is either working or actively looking for work.
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 benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. Individual funds and investment portfolios will generally have established benchmarks for standard analysis. A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments.
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.
The group of individual securities held by a person or an institution.
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.
The original amount of money invested or lent, as distinguished from profits or interest earned on that money.
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.
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.
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.
Qualified automatic contribution arrangements (QACAs) refer to a rule established under the Pension Protection Act of 2006 to increase worker participation in self-funded retirement plans. Such plans include 401(k)s, 403(b)s, and deferred compensation 457s. Companies that use QACAs automatically enroll workers in the plans at a deferral rate at or above 3%, unless employees take action to opt out.
An investment option a plan sponsor may use for 401k plan contributions in the absence of direction from a plan participant.
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.
An employer contribution that’s intended to replace the lost opportunity to a participant who wasn’t permitted to make elective deferrals. The QNEC must be 100% vested and subject to the same distribution restrictions as elective deferrals.
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.
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.
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.
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.
A CODA, Cash or Deferred Arrangement 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.
A company that provides some type of service to a 401k plan, including managing assets, recordkeeping, providing plan education, and plan administration.
A self-directed brokerage account (SDBA) is a brokerage window designed to allow participants to select investments outside of the core retirement offering while staying within the plan and receiving the associated tax benefits.
An investments strategy that only purchases securities of individual companies that espouse some form of social responsibility, such as “green” funds that target investments reflecting environmental awareness.
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.
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.
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.
A party hired by a plan or its fiduciaries to aid in performing management and/or recordkeeping functions on behalf of the plan.
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.
The opposite of a bundled plan which includes all investment, administration, education, and recordkeeping that is sold as one unit.
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.
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.
An annuity is a very unique financial product that offers guarantees of principal and income. They can be useful if you have concerns about running out of money or losing money.
A fixed annuity is a financial product that guarantees principal and pays a stated interest rate. One nice feature of fixed annuities is they grow tax-deferred.
A variable annuity is a financial product that grows based on the performance of the chosen subaccounts. The value may go up or down in the account, and like all annuities the earnings grow tax-deferred.
A 401(k) is particular savings program offered by many employers. 401(k) plans allow employees to invest in different kinds of mutual fund accounts on a pre-tax basis. Some of the attractive features of 401(k)s are that contributions are automatically withdrawn from employee paychecks and oftentimes matched by employers.
An IRA allows you to save money for retirement and get a tax deduction and any earnings can potentially grow tax-deferred until you withdraw them in retirement. They are one of the most popular retirement savings vehicles. There are many different investments that can fund IRA’s but typically investors use mutual funds.
A ROTH IRA is a popular way to save money for retirement. These programs are not tax-deductible, however once you make a contribution your earnings are never taxed (as long as you hold the account for five years). Like regular IRA’s there are many different investments that can fund these programs, however mutual funds are often utilized.
A Roth conversion occurs when you move assets from a Traditional, SEP or SIMPLE IRA (collectively referred to as a Traditional IRA in this article) or qualified employer sponsored retirement plan (QRP) — such as a 401(k), 403(b), or governmental 457(b) — and reposition them to a Roth IRA. This creates an immediate taxable situation, however once the funds are in the Roth IRA the interest will no longer be taxed (assuming you wait five years).
Long-term care (LTC) insurance is coverage that provides nursing-home care, home-health care, and personal or adult daycare for individuals age with a chronic or disabling condition that needs constant supervision. BEnefits are triggered when 2 out of 6 Activities of daily living can not be performed. These include: bathing, dressing, toileting, transferring, eating and maintaining continence. Additionally if someone is deemed to have cognitive impairments they can qualify for benefits as well.
A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets…
Estate Planning involves setting up a plan that establishes who will eventually receive your assets. It also makes known how you want your affairs to be handled in the event you are unable to handle them on your own for any reason. Oftentimes people believe estate planning is only necessary if you are wealthy, however it is important for everyone. If you don’t create your own estate plan the state in which you live will have an estate plan for you.
The year after you turn 72 a person is required to take a minimum distribution from their traditional IRA or any other qualified plan.
Explanation coming soon
A Simplified Employee Pension IRA is a retirement savings plan established by employers and easy to set up. Employers make tax deductible contributions on behalf of employee’s. Employee’s make no contributions and each employee is 100% vested immediately.
A 457 plan is a employee retirement plan offered by state, local government and some non-profit employers. They grow taxed deferred and like a 401k will be taxable when money is withdrawn. Employers can also match contributions.