Glossary of Terms

Glossary of Retirement Plan Terms

401K: 401(k) Plans are defined contribution plans funded primarily by the pre-tax contributions of employees. These plans allow employees to save part of their salaries and defer paying taxes until they receive the money.

Accrued benefit: The amount of benefit that will be provided to a participant in a defined benefit plan when that participant reaches normal retirement age.

Actuary: A business professional who uses mathematical formulas, statistics and risk analysis to calculate the employer's annual contributions to a defined benefit plan.

Administrative Fees:  The plan administrative fees involve expenses for recordkeeping, accounting, legal and trustee services and other services necessary to administer the retirement plan.

Annual minimum contributions: The amount an employer must contribute to the retirement plan on behalf of an employee, which amount varies depending on the type of the plan.

Annual nondiscrimination testing: Yearly tests to determine if benefits for highly compensated employees exceed established limits as compared to the benefits for non highly compensated employees.

Annual return: Although retirement plans are generally not required to pay taxes, some plans must annually file Form 5500 and related Schedules to report financial and operational information.

Automatic Enrollment: In Automatic Enrollment 401(k) Plans, employees are enrolled unless they opt out and contributions are deducted from their paychecks.

Benefit: The amount and method of payment a plan will pay to an employee or his or her beneficiary upon the occurrence of some event described in the plan, like retirement, disability or death.

Benefit formula: The method (usually a mathematical equation) a plan uses to calculate the amount of benefits earned by employees.

Catch-up contributions: Plans that allow employees to contribute to their own retirement may permit employees age 50 or older at the end of the calendar year to make additional (catch-up) contributions to plans. Amount of the catch-up contributions depend on the type of plan.

Contribution limits: The law limits the amounts that can be contributed annually to a plan for an employee. The limits differ depending upon the type of plan and upon whether it is the employer or the employee who is contributing.

Cover: The law requires an employer who has a retirement plan to enroll employees who meet certain requirements. The eligibility requirements vary by type of plan. An employer may use less restrictive eligibility requirements than those legally required.

Coverage tests: The law requires certain plans to meet annual tests to ensure that plans do not disproportionately benefit the business’ owners and highly compensated employees.

Defined Benefit Plan:  A qualified retirement plan that is designed to provide each participant with a fixed income at retirement. Contributions are made by the employer.

Defined contribution plan: Benefit plan in which the contribution amount is defined but the amounts contributed and the performance of the plan’s investments ultimate benefit to be paid is not. Total benefits at retirement depend on the contribution amounts and performance.

Employee stock ownership plan:  Benefit plan based on employee ownership of company stock.

Employer contributions:  Money deposited by an employer into the plan for the benefit of plan participants.

Expense Ratio: The total costs charged by an investment company to operate a mutual fund. The expense ratio is calculated annually by taking the fund’s operating expenses and dividing by the average dollar value of its assets under management. Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors. Specific details about a fund’s expense ratio are located in the fund’s prospectus.

Fiduciary:  A person identified in a benefit plan as having decision-making authority with respect to the plan investments.             

Final average pay: A number of months or years, as specified in a defined benefit plan, used to determine an employee’s average salary, which in turn determines the amount of benefits the participant will receive.

Hardship withdrawals: Certain plans may allow employees to withdraw money from the plan while still employed to relieve an immediate and heavy financial need of the employee, dependent or beneficiary. Amount withdrawn can't be more than necessary to satisfy the financial need.

Highly compensated employees: An individual who owned more than 5% of the employer business at any time during the year or the preceding year or received compensation for the preceding year of more than an annually adjusted amount.

Investment policy statement: A written document that defines the long-term objectives and constraints of a plan.

Loans: If permitted by the plan, amount that an employee may borrow from the plan but must repay along with stated interest.

Matching contribution: The amount an employer deposits to the plan for a plan participant that equals some portion (usually percentage) of an employee’s contributions.

Payroll deduction: The amount an employee chooses to have the employer deduct from his or her wages to deposit to a retirement plan.

Plan Administrator: Is responsible for managing day-to-day affairs of the retirement plan.

Plan Trustee: Holds the title to the plan assets and manages the assets of the plan, unless delegated to an investment manager.

Pre-approved plan: The plan document, for some types of plans, sold by institutions or practitioners that has been approved in form by the IRS as meeting that plan type's basic legal requirement.

Profit Sharing Plan:  A retirement plan that depends of contributions from employers who agree to share a percentage of the company profits with their employees.

QDIA Qualified Directed Investment Alternative:  A QDIA is an investment designated as a default investment for plan participants in a qualified retirement plan. The investment must meet the following DOL requirements.

  • A QDIA may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the qualified default investment alternative to any other investment alternative available under the plan.
  • A QDIA must be either managed by an investment manager, or an investment company registered under the Investment Company Act of 1940.
  • A QDIA must be diversified so as to minimize the risk of large losses.
  • A QDIA may not invest participant contributions directly in employer securities.
  • A QDIA may be:
    • Life-cycle or targeted-retirement-date fund;
    • Balanced fund; or
    • Professionally managed account.

Safe Harbor 401(k): Safe Harbor 401(k) Plans are defined contribution plans funded by the pre-tax contributions of employees. In the Safe Harbor 401(k) plans, however, employers are required to make a minimum amount of contributions, but are not required to undergo nondiscrimination tests required under traditional 401(k) tests.

Salary deferrals: The amount an employee can choose to have the employer deduct from his or her pay for contribution into a retirement plan that permits employee contributions. The amount an employee can defer varies by type of plan and is subject to annual limits.

Simplified Employee Pension (SEP):  A SEP allows deductible contributions without getting involved in more complex retirement plans. Under this type of retirement plan, an employer makes contributions on behalf of its employees to an individual retirement arrangement called a SEP-IRA.

Set up: The process to establish a plan. Generally adopting a plan document (model form, pre-approved or individually drafted) and setting up an account(s) or trust to receive deposited money. 403(b) plans require written program but not a single plan document.

Vested: An individual becomes vested in a retirement plan when he or she has the years of service required to receive a pension. Vesting means an individual has the right to collect a pension at a specific age, even if he or she does not stay with the company or organization for their entire working career.

Vesting: The portion of retirement benefits owned by the employee and no longer at risk of being forfeited. Plan must state the yearly percentage the employee is vested in his or her retirement benefits. Employee contributions must be immediately vested.

Vesting schedule: Timeline for payment of benefits based upon the individual’s length of employment.


Glossary of General Investment Terms

12b-1 Fee: A fee assessed on certain mutual funds or share classes permitted under an SEC rule to help cover the costs associated with marketing and selling the fund. 12b-1 fees may also be used to cover shareholder servicing expenses.

Active Management: The trading of securities to take advantage of market opportunities as they occur, in contrast to passive management. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell.

AMEX Major Market Index (XMI): An index that is an average of 20 Blue Chip Industrial Stocks.

Annual Rate of Return: The annual rate of gain or loss on an investment expressed as a percentage.

Appreciation: An increase in the value of an investment.

Asset Allocation: A method of investing by which investors include a range of different investment classes – such as stocks, bonds, and cash equivalents – in their portfolios. See Diversification.

Asset Class: A group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (e.g., stocks), fixed income (e.g., bonds), and cash equivalents (e.g., money market funds).

Average Annual Total Return: The yearly average percentage increase or decrease in an investment’s value that includes dividends, gains, and changes in share price.

Basis Point: One-hundredth of one percent, or 0.01%. For example, 20 basis points equal 0.20%. Investment expenses, interest rates, and yield differences among bonds are often expressed in basis points.

Benchmark: An unmanaged group of securities whose performance is used as a standard to measure investment performance. Some well-known benchmarks are the Dow Jones Industrial Average and the S&P 500 Index.

Bond: A debt security which represents the borrowing of money by a corporation, government, or other entity. The borrowing institution repays the amount of the loan plus a percentage as interest. Income funds generally invest in bonds.

Bond Rating: A rating or grade that is intended to indicate the credit quality of a bond, considering the financial strength of its issuer and the likelihood that it will repay the debt. Agencies such as Standard & Poor’s, Moody’s Investors Service, and Fitch issue ratings for different bonds, ranging from AAA (highly unlikely to default) to D (in default).

Capitalization (Cap): The total market value of a company's outstanding equity.

Capital Gain: An increase in the value of an investment, calculated by the difference between the net purchase price and the net sale price.

Capital Loss: The loss in the value of an investment, calculated by the difference between the purchase price and the net sale price.

Cash Equivalent: An investment that is short term, highly liquid, and has high credit quality.

Common Stock: An investment that represents a share of ownership in a corporation.

Compounding: The cumulative effect that reinvesting an investment’s earnings can have by generating additional earnings of their own.

Corporate Bond: A bond issued by a corporation, rather than by a government. The credit risk for a corporate bond is based on the re-payment ability of the company that issued the bond.

Current Yield: The current rate of return of an investment calculated by dividing its expected income payments by its current market price.

Diversification: The practice of investing in multiple asset classes and securities with different risk characteristics to reduce the risk of owning any single investment.

Dividend: Money an investment fund or company pays to its stockholders, typically from profits. The amount is usually expressed on a per-share basis.

Dow Jones Industrial Average (Dow or DJIA): A widely followed price-weighted index of 30 of the largest, most widely held U.S. stocks.

Emerging Market: Generally, economies that are in the process of growth and industrialization, such as in Africa, Asia, Eastern Europe, the Far East, Latin America, and the Middle East which, while relatively undeveloped, may hold significant growth potential in the future. Investing in these economies may provide significant rewards, and significant risks. May also be called developing markets.

Equity/Equities: A security or investment representing ownership in a corporation, unlike a bond, which represents a loan to a borrower. Often used interchangeably with “stock.”

Expense Ratio: A measure of what it costs to operate an investment, expressed as a percentage of its assets or in basis points. These are costs the investor pays through a reduction in the investment's rate of return. See Operating Expenses and Total Annual Operating Expenses.

Federal Deposit Insurance Corporation (FDIC): A federal agency that insures money on deposit in member banks and thrift institutions.

Financial Industry Regulatory Authority (FINRA): A self-regulatory organization for brokerage firms doing business in the United States. FINRA operates under the supervision of the SEC. The organization’s objectives are to protect investors and ensure market integrity.

Fixed Return Investment: An investment that provides a specific rate of return to the investor.

Government Securities: Any debt obligation issued by a government or its agencies (e.g., Treasury Bills issued by the United States).

Index: A benchmark against which to evaluate a fund's performance. The most common indexes for stock funds are the Dow Jones Industrial Average and the Standard & Poor's 500 Index.

Inflation: The overall general upward price movement of goods and services in an economy. Inflation is one of the major risks to investors over the long term because it erodes the purchasing power of their savings.

Interest/Interest Rate: The fee charged by a lender to a borrower, usually expressed as an annual percentage of the principal. For example, someone investing in bonds will receive interest payments from the bond’s issuer.

Interest Rate Risk: The possibility that a bond’s or bond fund’s market value will decrease due to rising interest rates. When interest rates (and bond yields) go up, bond prices usually go down and vice versa.

Investment Adviser: A person or organization hired by an investment fund or an individual to give professional advice on investments and asset management practices.

Investment Objective: The goal that an investment fund or investor seeks to achieve (e.g., growth or income).

Investment Return: The gain or loss on an investment over a certain period, expressed as a percentage. Income and capital gains or losses are included in calculating the investment return.

Investment Risk: The possibility of losing some or all of the amounts invested or not gaining value in an investment.

Large Capitalization (Cap): A reference to either a large company stock or an investment fund that invests in the stocks of large companies.

Large Cap Stocks: Stocks of companies with a large market capitalization. Large caps tend to be well-established companies, so their stocks typically entail less risk than smaller caps, but large-caps also offer less potential for dramatic growth.

Liquidity: The ease with which an investment can be converted into cash. If a security is very liquid, it can be bought or sold easily. If a security is not liquid, it may take additional time and/or a lower price to sell it.

MSCI EAFE Index: An index known by an acronym for the Europe, Australasia, and Far East markets produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization. The index is a widely used benchmark for managers of international stock fund portfolios.

MSCI World Index: An index of major world stock markets, including the United States.  The index is a widely used benchmark for managers of global stock fund portfolios.

Management Fee: A fee or charge paid to an investment manager for its services.

Market Capitalization or Market Cap: The total market value of a company's outstanding securities, excluding current liabilities.

Market Risk: The possibility that the value of an investment will fall because of a general decline in the financial markets.

Maturity Date: The date on which the principal amount of a loan, bond, or any other debt becomes due and is to be paid in full.

Mid Capitalization (Cap): A reference to either a medium sized company stock or an investment fund that invests in the stocks of medium-sized companies.

Mid Cap Stocks: Stocks of companies with a medium market capitalization. Mid caps are often considered to offer more growth potential than larger caps (but less than small caps) and less risk than small caps (but more than large caps).

Money Market Fund: A mutual fund that invests in short-term, high-grade fixed-income securities, and seeks the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price).

Morningstar: A leading mutual fund research and tracking firm. Morningstar categorizes funds by objective and size, and then ranks fund performance within those categories.

Mutual Fund: An investment company registered with the SEC that buys a portfolio of securities selected by a professional investment adviser to meet a specified financial goal (investment objective).

NASDAQ: The National Association of Securities Dealers Automated Quotation, also called the “electronic stock market.” The NASDAQ composite index measures the performance of more than 5,000 U.S. and non-U.S. companies traded “over the counter” through NASDAQ.

Net Asset Value (NAV): The net dollar value of a single investment fund share or unit that is calculated by the fund on a daily basis.

Operating Expenses: The expenses associated with running or operating an investment fund.  Operating expenses may include custody fees, management fees, and transfer agent fees.

Passive Management: The process or approach to operating or managing a fund in a passive or non-active manner, typically with the goal of mirroring an index. These funds are often referred to as index funds and differ from investment funds that are actively managed.

Portfolio: A collection of investments such as stocks and bonds that are owned by an individual, organization, or investment fund.

Portfolio Manager: The individual, team or firm who makes the investment decisions for an investment fund, including the selection of the individual investments.

Principal: The original dollar amount of an investment. Principal may also be used to refer to the face value or original amount of a bond.

Prospectus: The official document that describes certain investments, such as mutual funds, to prospective investors. The prospectus contains information required by the SEC, such as investment objectives and policies, risks, services, and fees.

Rate of Return: The gain or loss on an investment over a period of time. The rate of return is typically reported on an annual basis and expressed as a percentage.

Real Rate of Return: The rate of return on an investment adjusted for inflation.

Rebalance: The process of moving money from one type of investment to another to maintain a desired asset allocation.

Risk: The potential for investors to lose some or all the amounts invested or to fail to achieve their investment objectives.

Risk Tolerance: An investor's ability and willingness to lose some or all of an investment in exchange for greater potential returns.

Russell Indexes: A group of indexes that are widely used to benchmark investment performance. The most common Russell index is the Russell 2000 Index, an index of U.S. small-cap stocks, which measures the performance of the 2,000 smallest U.S. companies in the Russell 3000 Index.

Security: A general term for stocks, bonds, mutual funds, and other investments.

Share: A representation of ownership in a company or investment fund.

Shareholder: An owner of shares in an investment fund or corporation.

Small Cap Stocks: Stocks of companies with a smaller market capitalization. Small caps are often considered to offer more growth potential than large caps and mid caps but with more risk.

Standard & Poor's 500 Stock Index (S&P 500): An index comprised of 500 widely held common stocks considered to be representative of the U.S. stock market in general. The S&P 500 is often used as a benchmark for equity fund performance.

Stock: A security that represents an ownership interest in a corporation.

Trustee: A person or entity (e.g., bank, trust company, or other organization) that is responsible for the holding and safekeeping of trust assets. A trustee may also have other duties such as investment management. A trustee that is a “directed trustee” is responsible for the safekeeping of trust assets but has no discretionary investment management duties or authority over the assets.

Unit Value: The dollar value of each unit on a given date.

U.S. Treasury Securities: Debt securities issued by the United States government and secured by its full faith and credit. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries.

Volatility: The amount and frequency of fluctuations in the price of a security, commodity, or a market within a specified time period. Generally, an investment with high volatility is said to have higher risk since there is an increased chance that the price of the security will have fallen when an investor wants to sell.

Yield: The value of interest or dividend payments from an investment, usually stated as a percentage of the investment price.