Want a deeper dive into many of the 401(k) terms and their definitions to better help you understand the sometimes confusing world of 401(k) plans? Here is an extended list of common 401(k) terms and their definitions to help 401(k) plan managers understand the more technical terminology used in the 401(k) industry. 

Sources: www.401khelpcenter.com, www.irs.gov, www.sec.gov
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

12(b)1 Fees

A type of mutual fund fee that is used to compensate brokers for selling certain funds, like a commission. Typically the fee ranges from .25 to 1%, and is included in the fund’s expense ratio.

3(21) Investment Adviser

A paid professional who provides investment recommendations for the 401(k) plan to the plan sponsor. However, the plan sponsor ultimately retains the decision making authority and may accept or reject the recommendations. A 3(21) Investment Adviser shares fiduciary responsibility with the plan sponsor.

3(38) Investment Manager

An authorized investment professional responsible for selecting, monitoring and replacing investments in the 401(k) plan. A 3(38) Investment Manger relieves the plan sponsor of fiduciary responsibility for managing the plan’s investment lineup.

401(k) Plan

An IRS-qualified savings plan that is sponsored by an employer to allow employees to save for retirement directly from their paycheck on a post-tax and/or pre-tax basis.

401(k) Plan Sponsor

A designated party—typically the employer—who sponsors a 401(k) plan for the benefit of the plan participants—typically its employees.

403(b) Plan

Section 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with either annuities or mutual fund shares. A 403(b) is similar to a 401(k), but is exclusively for certain tax-exempt organizations, certain ministers, and public schools.

404(a)5

This is a regulation regarding “participant disclosures” which requires that sponsor of participant-directed ERISA plans provide specific information to all plan participants (including those eligible but not participating) including fees, expenses and other plan and investment-related information.

404(c)

Optional regulation on plan sponsors to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.

408(b)2

This is a regulation regarding “sponsor disclosures” which requires covered service providers to provide fiduciaries of ERISA plans with a description of the services they provide, the compensation they expect to receive in connection with those services and identification of any services provided as a fiduciary.

A

Active Management

When a person or team actively makes investment decisions within a fund. The opposite of active management is called passive management, which is also known as “indexing.”

Actual Contribution Percentage (ACP)

This is a type of annual compliance testing that must be performed on a 401(k) plan to make sure the plan doesn’t disproportionately benefit the highly-compensated employees. It is calculated by taking the average ratios of combined contributions to compensation for both highly-compensated and non-highly-compensated employees. The results are averaged out within the two groups and then compared.

Actual Deferral Percentage (ADP)

This is a type of annual compliance testing that must be performed on a 401(k) plan to make sure the plan doesn’t disproportionately benefit the highly-compensated employees. It is calculated by taking the proportion of each participant’s compensation to deferral rate for all highly-compensated and non-highly-compensated employees. The results are averaged out within the two groups and then compared.

Administrator

A service provider for a 401(k) plan who maintains the plan document, performs annual compliance testing, and prepares annual IRS filings like Form 5500. The administrator may be the same party as the recordkeeper. If the administrator is not the same party as the recordkeeper, they might be called a Third Party Administrator.

Adoption Agreement

The section of a retirement plan document that allows the employer to choose the provisions that apply to its employer-sponsored retirement plan.

Advisory Letter

A written statement issued by the Internal Revenue Service (IRS) 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).

Annual Defined Contribution Limit

This is correct but needs to be reviewed/updated annually. More generally this is “The maximum 401(k) contribution limit that applies to all employee and employer 401(k) 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.”

Annuity

A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

Asset

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

Asset Allocation

The dividing of an investment portfolio among the major asset categories. The most important decision investors will make.

Asset allocation fund

A common type of 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.

Automatic Contribution Arrangement (ACA)

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 401(k) 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.

Automatic Enrollment

A plan feature where all eligible employees are automatically enrolled in the plan without requiring the employees to submit a request to participate. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan.

Automatic Escalation

A plan feature which allows participants to elect to automatically increase their elective deferrals on a periodic basis. For example, every January 1, the elective deferral automatically increases by 1%.

B

Balanced Fund

A common type of mutual fund that maintains a balanced portfolio, generally 50% bonds and 50% stocks. This percentage can vary.

Benchmark

A standard point of reference against which investment performance within each fund of the 401(k) plan can be assessed. Plan fees and services can also be benchmarked.

Blackout Period

The period of time that a 401(k) plan goes offline during a service provider transition. Participants are not able to make any adjustments to their accounts during this time.

Bond

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

Bundled Plan

A 401k package which includes all investment, administration, education, and recordkeeping that is sold as one unit. This is in contrast to a basic 401(k) plan in which the plan sponsor can individually hire each component provider separately.

Buy-and-Hold

A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.

C

Cash Balance Plan

A type of defined benefit plan that can be used alongside a 401(k) plan in order to allow higher maximum contribution limits. All contributions come from the company and are pooled and trustee-directed. 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.

Capital Gain

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

Catch-up Contribution

An amount ($6,000 for 2019) that participants age 50 or older are able to contribute to their 401(k), in addition to the standard contribution limit ($19,000 for 2019).

Catch-up Provision

A provision found in some 401(k) plans that allows eligible employees who are at least age 50 to make higher annual contributions in the years prior to retirement.

Certificate of Deposit

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

Churning

The unethical and excessive trading of a client account in order to generate commissions for a broker. This is typically not in the best interest of the client because not only does the client pay high commissions, they can also get stuck with a high tax bill due to the short-term holding of assets.

Cliff Vesting

A 401(k) 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 Funds

An investment vehicle that functions like a mutual fund, but it is sponsored by a bank and is only available to qualified retirement plans—like 401(k) plans. They are also referred to as collective investment trusts (CITs) or collective investment funds (CIFs).

Common stock

An investment representing ownership interest in a corporation.

Compliance Testing

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

Compounding

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

Contingent Beneficiary

A contingent beneficiary stands second-in-line, behind the primary beneficiary, to inherit the assets of a retirement plan.

Contribution Limits

Annual limits set by the IRS on the amount that can be contributed to a 401(k) plan. For 2019, the maximum an individual can contribute is $19,000 (plus $6,000 in catch up for those 50 and older). The total that can be contributed on behalf of an individual (individual contribution + employer contribution) is $56,000 (plus $6,000 in catch up for those 50 and older).

Controlled Group

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”).

Corrective Distribution

A distribution of funds from the plan to correct a nondiscrimination test or to correct a contribution in excess of a statutory limitation.

Custodian

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

D

Deemed IRA

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

Default

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 401(k) 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.

Deferral Rate

The percentage of income that participating employees contribute to the plan. Also called the elective deferral rate or savings rate.

Defined Benefit Plan

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

Defined Contribution Plan

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

Deflation

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

Department of Labor (DOL)

The federal agency responsible for work-related benefits and rights, including administering ERISA.

Depreciation

Decrease in the value of an investment over time.

Direct Rollover

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

Discrimination Testing

All tax-qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, every tax qualified retirement plan (like a 401(k)) 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 to be excluded from gross income.

Diversification

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

Dollar-Cost Averaging

The process of buying securities at regular intervals and at a fixed dollar amount. This is typically accomplished with periodic contributions to a 401(k) plan. 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.

E

Elective Deferral

An amount contributed to a 401(k) 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 (EACA)

A type of automatic contribution arrangement that may be included in a 401(k) 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.

Employee Stock Ownership Plan (ESOP)

A type of defined contribution plan that is invested primarily in employer stock.

Employer Matching Contribution

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

Employer Discretionary Contributions

If the 401(k) plan allows for employer discretionary contributions, then the employer is able to make an optional 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.

Equities

Also known as stocks, equities give the investor a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value.

ERISA

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.

ERISA Plan Audit

An examination of a 401(k) plan’s financial statements conducted by a certified public accountant. Plans with more than 100 participants are required to be audited annually.

Exchange Traded Fund (ETF)

A marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.

Expense Ratio

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

F

401(k) plan

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

403(b) plan

SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares. A 403(b) is similar to a 401(k), but is exclusively for certain tax-exempt organizations, certain ministers, and public schools.

404(c)

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

Fiduciary

An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. For example, any person who exercises any discretionary authority or control over the management of a 401(k) retirement plan or its assets.

Fiduciary Audit File

A compilation of all documents a plan sponsor would need in the event of a plan audit. Can be maintained as a physical or electronic file.

Fiscal Year

An accounting period consisting of 12 consecutive months.

Fixed-Income Securities

Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times. Public and private bonds, government securities, and the 401(k)’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.

Force Out

A terminated employee that still has a balance in the 401(k) plan can be “forced out” of the plan if their balance is less than $5,000. Removing these employees from the plan can help minimize plan administration costs.

Forfeiture

The part of an employee’s account balance (employer contributions) that is lost because it is not vested when the employee terminates employment.

Form 5500

A compliance, research and disclosure tool for the Department of Labor. Every 401(k) must file one annually in order to remain compliant.

Form ADV

The form used by investment advisers to register with the Securities & Exchange Commission (SEC) and state securities authorities. Part 2 of Form ADV is where investment advisers disclose information about their firm, their business practices and their fees. Investment Advisers are required to deliver Part 2 of Form ADV to all clients and prospective clients.

Frozen Plan

A plan under which accruals and/or contributions have ceased but assets are still held for participants and beneficiaries.

G

Gap Analysis

A comparison between how much income an individual is projected to have during retirement and their projected financial needs during retirement. The gap between these two numbers helps individuals understand whether they are on track to achieve their retirement goals.

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.

Glide Path

The gradual reduction of risk within a portfolio based on the number of years to a target date (typically a retirement date). This is achieved by adjusting the allocation of assets to more conservative investments. This term is typically used when referring to target-date mutual fund strategies.

Guaranteed Investment (Interest) Contract (GIC)

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

H

Hardship Withdrawal

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.

Highly Compensated Employee (HCE)

For 2019, any employee who:

  • Will earned more than $125,000 in gross compensation in 2019; or
  • Is a 5% (or greater) owner of the company; or
  • Is a direct family member (spouse, child, parent, grandparent) of a 5% (or greater) owner of the company

I

Investment Adviser

A service provider for a 401(k) plan who may help select and monitor investments, and meet with you and your employees on a regular basis to make sure the plan is running well and help employees with their retirement goals.

Income Fund

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

Index

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.

Index Fund

A common type of mutual fund that seeks to mirror general market performance by matching its portfolio to an index. For example, 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.

Inflation

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

In-Service Withdrawal

A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals of elective deferrals are prohibited by law prior to age 59 ½. While allowed by law after that age, only some plans allow for it.

Insider Trading

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

Integration

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

Interest

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

Investment Adviser

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

J

K

Keogh Plan

Also known as H.R. 10 Plans, this is a tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses.

Key Employee

An employee who at any time during the plan year owns more than 5% of the business, or owners more than 1% of the business and has annual compensation greater than $180,000 (for 2019).

L

Lagging Indicator

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

Leading Indicator

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

Lifestyle Fund

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

Liquidity

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

Longevity Risk

The risk of outliving one’s retirement savings and income.

Lump Sum

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).

M

Margin

The use of borrowed money to purchase securities (buying “on margin”).

Market Risk

The volatility of a stock price relative to the overall market or index as indicated by beta.

Market Sentiment

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

Market Timing

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

Matching Contribution

Employer contributions that are made on account of elective deferrals or employee after-tax contributions.

Minimum Contribution

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 type of 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 Purchase Plan (MPP)

A defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer’s contributions or be reallocated among remaining employees.

Mutual Fund

A type of pooled investment vehicle regulated by the Securities and Exchange Commission. Investors’ money is collectively invested in other securities, like stocks or bonds.

N

Named Fiduciary

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

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 fund’s total assets, securities, cash and any accrued earnings deducting liabilities, and dividing the remainder by the number of shares outstanding.

Non-Discrimination Rules

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

Non-Elective Contribution

A type of contribution an employer makes to their employee’s retirement plan account regardless of whether the employees make a contribution to the plan.

Non-Highly-Compensated Employee (NHCE)

Any employee that is not a highly-compensated employee. This group of employees is determined on the basis of compensation or ownership interest. See Highly-Compensated Employee.

Non-Qualified Deferred Compensation Plan

A plan subject to tax, in which the assets of certain employees (usually Highly-Compensated Employees) are deferred.

Non-Qualified Plan

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.

O

Opinion Letter

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).

Orphan Plan

A defined contribution plan for which there is no plan sponsor or other plan fiduciary willing to act with respect to the plan.

P

Participant

An employee who is eligible to either make contributions to the retirement plan or to share in employer contributions to the plan.

Participant Contributions

The dollars that employees contribute to their 401(k) plans.

Participant-Directed Account

A plan that allows participants to select their own investment options.

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.

Participation Rate

The percentage rate at which eligible employees participate (make contributions) in a plan. Many plans use this as a metric to help understand how engaged their employees are in the plan. It is calculated by taking the number of employees participating in the plan divided by the total number of employees that are eligible to participate in the plan.

Plan Administrator

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.

Plan Benchmark

A process to help determine whether fees paid by plans are “reasonable.” Typically, this is done by comparing the fees paid by similarly sized plans receiving similar services.

Plan Document

A written instrument under which the plan is established and operated.

Plan Fiduciary

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.

Plan Sponsor

The entity (generally the employer) responsible for establishing and maintaining the plan.

Plan Trustee

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.

Plan Vendor

Companies that administer, service and/or sell 401(k) plans. They are generally employed by the plan sponsor.

Plan Year

The calendar or fiscal year for which plan records are maintained.

Portability

This occurs when, upon termination of employment, an employee transfers pension funds from one employer’s plan to another without penalty.

Portfolio

The group of individual securities held by a person or an institution.

Present Value

The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

Principal

The original amount of money invested or lent, as distinguished from profits or interest earned on that money.

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.

Prohibited Transaction

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.

Prospectus

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.

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.

Q

Qualified Automatic Contribution Arrangement (QACA)

A type of automatic enrollment arrangement with a special Safe Harbor provision that exempts a 401(k) plan from annual ADP and ACP testing requirements.

Qualified Default Investment Alternative (QDIA)

A plan’s default investment option that is used when a plan participant has not made an investment selection for their 401(k) assets.

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.

Qualified Non Elective Contribution (QNEC)

A contribution made by the employer to correct a 401(k) plan’s ADP or ACP testing failure.

Qualified Plan

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.

R

Real Rate of Return

The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

Recordkeeper

A service provider for a 401(k) plan who keeps track of the different money sources in the plan, provides online support and participant statements. The recordkeeper may also perform administrative, custodial or trustee functions.

Retirement Readiness

The degree to which plan participants are on track to achieve their financial retirement goals.

Request for Proposal (RFP)

A document issued by a plan sponsor asking service providers to respond with written proposals, enabling a formal comparison among multiple service providers.

Rollover

The process of moving money from one qualified account to another. For example, you can roll an IRA into a 401(k) account.

Roth 401(k)

A 401(k) 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.

S

Safe Harbor 401(k)

A Safe Harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make annual contributions for each employee that are immediately vested. These contributions can be structured as a match (100% match on the first 2% and 50% match on the next 2%) or a 3% non-elective which goes to each eligible employee regardless of whether they contribute. The advantage of a Safe Harbor 401(k) plan is that they are deemed to automatically pass ADP and ACP compliance testing.

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 401(k), 403b and 457 plans.

Service Provider

A company that provides some type of service to a 401(k) plan, including managing assets, recordkeeping, providing plan education, and plan administration. Examples of service providers include investment adviser, recordkeeper, third party administrator (TPA).

Self-Directed Brokerage Account

An option within a 401(k) plan that allows the participant to invest in funds, stocks or bonds outside of the plan’s investment lineup.

Sidecar IRA

See “Deemed IRA”

Socially Responsible Investing

An investment strategy that only purchases securities of individual companies that espouse some form of social responsibility. For example, “green” funds that target investments reflecting environmental awareness.

Summary Plan Description (SPD)

A brief summary of the plan’s provisions and features. 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.

T

Target Benefit

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.

Target Date Fund

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 60 days of receipt.

Third Party Administrator (TPA)

A party hired by a plan or its fiduciaries to conduct annual plan administration, including preparing IRS Form 5500, performing compliance testing and maintaining the plan document.

Top Heavy

When greater than 60% of the total assets in a 401(k) plan belong to key employees, the plan is deemed top heavy. If a plan is top heavy, the employer may be required to make a minimum top heavy contribution to non-key employees.

Treasury Bill

Short-term debt security issued by the federal government for periods of one year or less.

Treasury Bond

Longer-term debt security issued by the federal government for a period of seven years or longer.

Treasury Note

Longer-term debt security issued by the federal government for a period of one to seven years.

U

Unbundled Plan

When the recordkeeper and administrator (TPA) for a 401(k) plan are two separate vendors. In a bundled plan, the recordkeeper and administrator are the same vendor.

V

Valuation

The process of determining the current worth of an asset.

Vesting

The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.

Volume Submitter Plan

A type of retirement plan that has been pre-approved by the IRS.

W

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.

Y

Yield

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.

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