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Glossary of Terms

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401(k) plan: A tax-deferred retirement plan that can be offered by businesses of any kind. A 401(k) plan carries many unique advantages and plan design flexibility for both the employer and employee(s).  A 401(k) plan includes a compensation deferral option as well as the ability for employers to make tax deductible contributions.

403(b) plan: Allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans.  A 403(b) plan includes a compensation deferral option as well as the ability for employers to make tax deductible contributions.

404(c): Regulation allowing a plan sponsor to comply for reduced fiduciary liability by providing information regarding the plan’s investments, ability to make changes, etc. The intent is ensure that plan participants have the required information to make informed decisions in regards to their retirement plan investments.

457 Plan: Type of nonqualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers. The employer provides the plan and the employee defers compensation into it either on a pre-tax basis and/or Roth basis.

Active management: Where a person or team, often called the portfolio manager, actively makes investment decisions and initiates buying and selling of securities using analytical research, forecasts, and their own judgment and experience. The opposite of active management is called passive management, better known as "indexing."

ACP:  "Actual Contribution Percentage." In a 401(k) plan, ACP is the result of the average of ratios of combined Match contributions to compensation for both highly compensated and non-highly compensated employees. Each employee's ratio is calculated, totaled and then averaged for the group.

ADP: "Actual Deferral Percentage.” In a 401(k) plan, ADP is the result of the average of ratios of combined participant deferral (pre-tax and Roth) contributions to compensation for both highly compensated and non-highly compensated employees. Each employee's ratio is calculated, totaled and then averaged for the group.

Administrator: Employer unless another person or entity has been designated by the Employer to administer the Plan on behalf of the Employer. "Administrator" also includes any Qualified Termination Administrator (QTA) that has assumed the responsibilities of the Administrator in accordance with guidelines set forth by the Department of Labor.

Adoption Agreement: Separate agreement which is executed by the Employer and sets forth the elective provisions of the Plan and Trust as specified by the Employer.

Affiliated Employer: Any corporation which is a member of a controlled group of corporations, which includes the Employer; any trade or business (whether or not incorporated) which is under common control with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group which includes the Employer; and any other entity required to be aggregated with the Employer.

Affirmative Election: Salary Deferral Agreement submitted by a Participant to the Administrator that provides instructions to defer a specific amount of Compensation (including an affirmative election to defer no amount) as an Elective Deferral to the Plan.

Alternate Payee: An alternate payee pursuant to a qualified domestic relations order.

Anniversary Date: Last day of the Plan Year.

Annuity Starting Date: With respect to any Participant, the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitles the Participant to such benefit.

Asset Allocation Fund: A combination of stocks and/or mutual funds that maintains an asset allocation based on the risk that a participant would like to take.  These funds periodically adjust their portfolios so the risk is realigned with market changes.

Automatic Enrollment:  Type of automatic contribution arrangement that may be included in a 401(k) plan. Under the feature, unless an employee opts out of salary deferral participation, the employee will be automatically enrolled with a pre-determined percentage of pay and investment fund selection. The arrangement must satisfy a uniformity requirement and a notice requirement.

Beneficiary: Person (or entity) to whom all or a portion of a deceased Participant's interest in the Plan is payable.

Cash Balance Plan: A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest, regardless of how the actual investments perform. The Plan provides the benefits in the form of a lump-sum distribution or annuity.

Catch-up provision: A provision found in most 401(k) plans that allows an eligible employee who is at least age 50 to make higher annual contributions in the years prior to retirement.

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.

Code: Means the Internal Revenue Code of 1986, as it may be amended from time to time.

Contingent beneficiary: A contingent beneficiary stands second-in-line, behind the primary beneficiary, to inherit the assets of a retirement plan in the event of a participant’s death.

Contract (Policy): Any life insurance policy, retirement income policy, or annuity contract (group or individual) issued by the Insurer. In the event of any conflict between the terms of the Plan and the terms of any contract purchased hereunder, the Plan provisions shall control.

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 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").

Custodian: A person or entity that has custody of all or any portion of the Plan assets.

Defined benefit: A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees.

Defined contribution: A defined contribution plan does not promise a specific benefit at retirement, and in general allows for both employee and employer contributions.

Directed Trustee: A Trustee who, with respect to the investment of plan assets, is subject to the direction of the Administrator, the Employer, a properly appointed Investment Manager, a named Fiduciary, or Plan Participant. To the extent the Trustee is a Directed Trustee, the Trustee does not have any discretionary authority with respect to the investment of plan assets.

Discretionary Trustee: A Trustee who has the authority and discretion to invest, manage or control any portion of the plan assets.

Discrimination testing: All tax qualified retirement plans must be administered in compliance with many regulations to meet Internal Revenue Service guidelines. Every tax qualified retirement plan must pass a series of numerical measurements each year.  Some of the most common tests are: ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Coverage Test and Top-heavy Test.  In general, the tests act to prevent discrimination to non-highly compensated employees.

Distributions: When money is withdrawn from Plan, the withdrawal is referred to as a distribution.  Plan assets can be withdrawn without penalty after age 59 ½ if the Plan allows.  With some exceptions, employees are required to begin taking distributions after age 70 1/2.

Dividend: Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary.

Early Retirement Date: Date specified in the Plan document on which a Participant has satisfied the requirements specified (age and sometimes years of service). If elected in the Plan, a Participant shall become fully vested upon satisfying such requirements if the Participant is still employed at the Early Retirement Age.

Earned Income: Net earnings from self-employment in the trade or business with respect to which the Plan is established, for which the personal services of the individual are a material income-producing factor. Net earnings are reduced by contributions made by the Employer to a qualified plan to the extent deductible under code limits.

Effective Date: Date the Plan, including any restatement or amendment of the Plan, is effective. Where the Plan is restated or amended, a reference to Effective Date is the effective date of the restatement or amendment, except where the context indicates a reference to an earlier Effective Date.

Elective Deferrals: An amount contributed to a 401(k), 403(b) or 457 plan by an employee that allows participants to have a portion of their compensation (otherwise payable in cash) contributed to a retirement account on their behalf.  Elective deferrals can be either pre-tax or designated as Roth contributions if the plan has a Roth option.   

Employer discretionary contributions: Some employers also make an additional contribution at plan-year end in the form of increased matching contributions and/or a profit sharing contribution. These employer contributions, subject to IRS limits, are considered a tax-deductible business expense and also grow on a tax-deferred basis.

ERISA: “Employee Retirement Income Security Act”. This comprehensive law was passed in 1974 and covers all areas of pensions and employee benefits, not just 401(k) plans. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration.

Excess Compensation: With respect to a Plan that is integrated with Social Security (permitted disparity), a Participant's Compensation which is in excess of the integration level elected in the Plan document. However, if Compensation is based on less than a twelve (12) month "determination period," Excess Compensation shall be determined by reducing the integration level by a fraction, the numerator of which is the number of full months in the short period and the denominator of which is twelve (12).

Expense ratio: The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)(1) fees, if any, cost of shareholder mailings and other investment and administrative expenses. The ratio is listed in a fund's prospectus and on fee disclosure documents.

Fiduciary: A fiduciary is a person who is entrusted with the safekeeping of a retirement plan’s assets and is legally obligated to act in the best interest of plan participants. Commonly, owners, trustees, and some investment advisors are considered fiduciaries.  With limited exceptions, a fiduciary is anyone who: has or exercises any discretionary authority or discretionary control over the management or administration of the plan; has or exercises any authority or control with respect to management or disposition of the plan’s assets; gives investment advice to the plan for a fee or other direct or indirect compensation or has the authority or responsibility to do so.  It is important to note that having the authority can make you a fiduciary, even if you do not exercise that authority.

Fiscal Year: Employer's accounting year.

Fixed match: A matching contribution where the formula is specifically provided in the Plan document. The formula must be followed each year until the Plan is amended.

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 by the insurer against the loss of both principal and the interest earned on that principal. 

Forfeiture: That portion of a Participant's Account that is not vested and is disposed of in accordance with the provisions of the Plan. Unless otherwise elected in the Plan document, Forfeitures occur on the earlier of:

(1) The last day of the plan Year in which a Participant incurs five (5) consecutive 1-Year Breaks in Service, or

(2) The distribution of the entire vested portion of the Participant's Account of a Participant who has severed employment with the Employer.

Former Employee: An individual who has severed employment with the Employer or an Affiliated Employer.

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” is one who owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, lineal family members and spouse of 5% owners, or for the preceding year, received compensation from the business of more than $120,000 (if the preceding year is 2015), and if the Plan document states, was in the top 20% of employees when ranked by compensation.

Index: A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is a 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 trust fund or mutual fund with passive management that seeks to mirror general stock-market performance by matching its portfolio to a broad-based 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.

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 are restricted by law and the Plan document.

  • In-service withdrawals of elective deferrals (employee salary reduction contributions) are prohibited by law prior to age 59 1/2.
  • In-service withdrawals of non- safe harbor employer contributions are allowed under some circumstances prior to age 59 1/2.

Insurer: Any legal reserve insurance company which has issued or shall issue one or more Contracts or Policies under the Plan.

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 you receive 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 or a hard dollar fee.

Investment risk: Risk that an investment may not generate the desired returns over time, and may even result in the loss of any initial capital invested.

Joint and Survivor Annuity: An immediate annuity for the life of a Participant with a survivor annuity for the life of the Participant's Spouse which is not less than fifty percent (50%), nor more than one hundred percent (100%) of the amount of the annuity payable during the joint lives of the Participant and the Participant's Spouse. An annuity can be purchased with the Participant's Vested interest in the Plan reduced by any outstanding loan balances.

Keogh plan: A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual funds. (Also known as H.R. 10 plans.)

Key employee: An employee who at any time during the plan year meets certain income or ownership criteria.

Limitation Year: The "determination period" used to determine Compensation. All qualified plans maintained by the Employer must use the same Limitation Year. Furthermore, unless there is a change to a new Limitation Year, the Limitation Year will be a twelve (12) consecutive month period.  

Matching contribution: Employer contributions that are based on the elective deferrals (employee pre-tax, Roth) and compensation of plan participants.  Example: $.50 on each deferral dollar on the first 6% of compensation.

Money Market Fund: A common trust fund or mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including bank certificates of deposit, commercial paper, U.S. government securities and repurchase agreements.

Money Purchase Pension Plan (MPPP): A defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.

Mutual Fund: 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. 

Net Asset Value (NAV): The current market value of a mutual fund share. Calculated daily by taking the fund’s total assets (securities, cash and any accrued earnings deducting liabilities), then 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 tests.

Non-elective Contribution: The Employer's contributions to the Plan other than Elective Deferrals, Qualified Non-elective Contributions and Qualified Matching Contributions. Employer matching contributions are not Qualified Matching Contributions and shall be considered a Non-elective Contribution for purposes of the Plan.

Non-qualified plan: A plan that does not meet the requirements for preferential up front tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods. Many non-qualified plans are primarily designed for highly compensated employees.

Normal Retirement Age: Age elected in the Plan document at which time a Participant's Account shall be non-forfeitable if the Participant is employed by the Employer on or after that date. The most common normal retirement age is age 65. 

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

Participant Directed Account: A plan that allows participants to select their own investment options.

Plan Document: The written instrument under which the Plan is established and operated. It is commonly referred to as the Plan and Trust (typically an Adoption Agreement and Basic Plan Document) as adopted by the Employer, including all amendments thereto and any appendix which is specifically permitted pursuant to the terms of 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 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 service provider: Companies that administer and service retirement plans. They are most frequently employed by the plan sponsor and generally consist of a financial advisor, TPA/Plan Consultant, investment provider and or a record keeper.  Plans generally over 100/120 eligible employees require a CPA firm to annually audit the Plan.  ERISA attorneys are available to consult and advise on legal issues as well. 

Plan Year: The plan's accounting year as specified in the Plan document. Unless there is a short plan year, the plan Year will be a twelve-consecutive month period.

Pre-Tax Elective Deferrals: A Participant's Elective Deferrals that are not includible in the Participant's federal gross earned income at the time deferred. Most states allow a deduction to gross earned income as well.

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 plan that uses a variable level of tax deductible contributions generally based on company profits. Profit sharing plans allow firms to limit allocations in lean years.

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.

Qualified Default Investment Alternative (QDIA): An investment option a plan sponsor may use for 401(k) plan contributions in the absence of direction from a plan participant.

Qualified Domestic Relations Order (QDRO): A judgment, decree or order that creates or recognizes an alternate payee's (such as former spouse, child, etc.) right to receive all or a portion of a participant's retirement plan benefits.

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.

Regulation: Income Tax Regulations as promulgated by the Secretary of the Treasury or a delegate of the Secretary of the Treasury, and as amended from time to time.

Retirement Date:  Date as of which a Participant retires for reasons other than Total and Permanent Disability, regardless of whether such retirement occurs on a Participant's Normal Retirement Date, Early Retirement Date or Late Retirement Date.

Rollover: 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 distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to another plan or IRA.

Roth 401(k): A 401(k) plan feature that allows employees to make elective contributions on an after-tax basis. Qualified withdrawals, generally after age 59½, of any money from the account (including investment gains) are tax-free.

Safe harbor 401(k): A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to state the contributions they will make for each employee. The safe harbor provisions allows highly compensated employees to maximize their salary deferral options on an annual basis up to the IRS limits while allowing the Plan to bypass certain compliance tests. 

Self-Employed Individual: An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established, and also an individual who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year. A Self-Employed Individual shall be treated as an Employee.

Short Plan Year:  If specified in the Plan document or as the result of an amendment, a plan year of less than a twelve (12) month period. 

SIMPLE IRA: A retirement plan that may be established by employers, including self-employed individuals (sole proprietorships and partnerships). The SIMPLE IRA allows eligible employees to contribute part of their compensation on a pre-tax basis to the Plan.  The accounts are tax deferred until distributed.

SPD: 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 within a certain time frame of attaining eligibility or upon Plan restatement.

Spouse:  As determined under federal tax law. The Employer may also elect to require that a Participant be married for at least one (1) year before the Participant is treated as married (and having a Spouse) for all purposes of the Plan other than for purposes of determining eligible hardship distribution expenses.

Stock dividend: A dividend paid in additional shares of stock rather than in cash.

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 as the participant nears retirement age and after. 

Taxable Wage Base: With respect to any plan Year, the contribution and benefit base under the Social Security Act at the beginning of such plan Year.  The wage base is indexed annually.

Terminated Participant: A person who has been a Participant, but whose employment has been terminated with the Employer (including an Affiliated Employer) or applicable Participating Employer, other than by death, Total and Permanent Disability or retirement.

Third-party Administrator: A party hired by a Plan or its fiduciaries to aid in performing administration, compliance, management and/or recordkeeping functions on behalf of the Plan.

Top-Heavy Plan:  In general, a retirement plan is top heavy if more than 60% of the plan’s assets are attributable to Key Employees. In determining this ratio for any plan year, the calculation is made as of the last day of the immediately preceding plan year.

Total and Permanent Disability: In general and defined by the Plan document, the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The disability of a Participant shall be determined by a licensed physician. However, if the condition constitutes total disability under the federal Social Security Acts, the Administrator may rely upon such determination that the Participant is totally and Permanently Disabled for the purposes of the Plan. The determination shall be applied uniformly to all Participants.

Trustee: Any person or entity that is named in the Plan document has otherwise agreed to serve as Trustee, or any successors thereto. The Trustee is a plan fiduciary and is responsible for the oversight of the Plan’s operation.

Valuation Date: Date or dates specified in the Plan document. Regardless of any election to the contrary, for purposes of the determination and allocation of earnings and losses, the Valuation Date shall include the Anniversary Date and may include any other date or dates deemed necessary or appropriate by the Administrator for the valuation of participants' accounts during the plan year. Most 401(k) plan assets are valued daily.

Vested: The non-forfeitable portion of any Account maintained on behalf of a Participant.

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.

Year of Service: The computation period of twelve (12) consecutive months and during which an Employee has completed at least 1,000 Hours of Service (unless a lower number of Hours of Service is specified in the Plan document).

Yield to maturity: The rate of return anticipated on a bond if it is held until the maturity date.

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.

Sources:  Paragon Alliance Group, LLC Plan Document, www.401khelpcenter.com/glossary ,www.investopedia.com