Retirement
Savings Jargon.

Don’t speak the language of finance?

Most people don’t. We’ve put together a glossary of frequently used terms.

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  • 12b-1 fee

    A fee that is paid out of a mutual fund’s assets to cover marketing and distribution costs of the fund or to pay commissions to brokers. The fee is usually between 0.25 percent and 1 percent of assets annually. It is included in the fund’s expense ratio, which is deducted from your 401(k) account each year. You can find the 12b-1 fee listed in the mutual fund’s prospectus; look in the fee table.

  • 401(k) plan

    The most common type of retirement plan offered by employers to their employees. 401(k) plans are defined contribution plans, meaning that you make regular contributions into your individual account. Your contributions are automatically transferred from your paycheck before taxes are deducted, which lowers your tax bill. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.

    You decide on the amount of your contributions, up to certain annual limits. You also decide how your money is invested by choosing from a selection of mutual funds and other investments offered by your employer.

    You don’t pay taxes on the investment earnings in your account; your money grows tax-free through the years. When you withdraw the money at retirement, you will pay income tax on it.

  • 403(b) plan

    A type of defined contribution retirement plan offered to employees of nonprofit organizations and public school systems. Also known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA). As with a 401(k) plan, the money you contribute and any earnings are not taxed until you withdraw the money.

  • 457 plan

    A type of defined contribution retirement plan offered to employees of state and municipal governments. As with a 401(k) plan, the money you contribute and any earnings are not taxed until you withdraw the money.

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  • Annuity

    A type of investment that is a contract between you and an insurance company. You make a lump-sum investment and the insurer makes guaranteed periodic payments to you, beginning immediately or at some future date.

  • Asset allocation

    The division of your investments among different types of assets–stocks, bonds and cash—to reduce your risk of losses. Your specific asset allocation will depend largely on how close you are to retirement and your risk tolerance. Through the years you should periodically rebalance your asset allocation, moving more of your money away from stocks (high risk) and into bonds and cash (lower risk) as you get closer to retirement.

  • Automatic enrollment

    A growing trend in which employees are automatically enrolled in a 401(k) plan by their employer. Employees can opt out by filing a request. With an automatic 401(k), the contribution rate and investments are usually preset by the employer, but employees have the right to change them.

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  • Beneficiary

    The person or institution named by a plan participant to receive the benefits of the account if the participant dies.

  • Bond

    A type of investment that is an IOU or debt. When you buy a bond, you are lending money to the issuer for a period of time. The issuer pays you regular interest payments and agrees to repay your investment (called the “principal”) at a certain date (the “maturity date”). Issuers of bonds include the U.S. government, local governments, and companies. The main types of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds.

  • Brokerage window account

    An option offered by some 401(k) plans that allows participants to invest in funds and individual stocks and bonds outside the regular investment menu. Also referred to as a self-directed account.

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  • Catch-up contributions

    A provision that allows employees who are at least 50 years old to make contributions to a 401(k) plan above the regular annual limit. This allows workers to “catch up” with saving as they get closer to retirement.

  • Contribution

    The amount of each paycheck that is deposited in your 401(k) account. This money is taken out of your paycheck before taxes are deducted. You decide on the amount of your contributions, up to certain annual limits. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.

  • Contribution limits

    The maximum amount of money you can contribute to your 401(k) each year, set by the federal government. The limits change every year to track inflation. In 2018 you can contribute up to $18,500. If you’re 50 or older, you can contribute an additional $6000 (called a “catch-up contribution”), for a total of $24,500. These limits do not include the match contributed by your employer to your account.

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  • Deferral rate

    The percentage of your annual pay that is deposited into your 401(k) account. The income tax you pay on this money is deferred until you take your 401(k) distributions in retirement.

  • Defined contribution plan

    A type of retirement plan sponsored by employers in which the employee makes regular contributions to an individual account. Employers can also make contributions to employee accounts. Unlike a “defined benefit plan” such as a pension, a defined contribution plan does not pay out a specific predetermined amount. The money is invested and allowed to grow; the amount you have at retirement depends on how well your investments perform.

    At retirement the money can be withdrawn along with any investment gains; you will pay income tax on the withdrawals. 401(k), 403(b), and 457 plans are all examples of defined contribution plans.

  • Distribution

    The money you withdraw from your 401(k) account. Distributions may be taken starting at age 59 ½. Distributions taken before then are subject to a 10% early withdrawal penalty. You are required to begin taking distributions after age 70 ½.

  • Diversification

    Spreading your money among various types of investments to reduce your risk of loss. You can diversify your 401(k) by investing it in a combination of different mutual funds such as stock funds, bond funds, and money market funds.

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  • Early withdrawal penalty

    The 10% penalty tax you must pay to the IRS on any 401(k) distributions taken before you reach age 59 ½. In addition to this penalty, you will also pay regular income taxes on any money you withdraw.

  • Employee Benefits Security Administration (EBSA)

    A branch of the U.S. Department of Labor that oversees workforce issues, including retirement plans such as 401(k)s. The EBSA website offers a wealth of consumer information on retirement plans at: http://www.dol.gov/ebsa/consumer_info_pension.html

  • Employer matching contribution

    An amount of money contributed to your 401(k) account each pay period by your employer. Also called the “employer match” or “company match,” it is offered by many companies as an incentive for employees to participate in a retirement plan. You have to contribute your own money to get the match.

    Most commonly, employers will match part or all of your contribution, up to a maximum percentage of your salary (usually 6%). Matching contributions may vest over time, meaning they don’t belong to you until after a specific period.

  • Equity

    Ownership in a company through the purchase of stock. When you buy shares of stock in a company, you have equity in the company. Equity investments are generally considered riskier than fixed-income investments.

  • ERISA

    The Employee Retirement Income Security Act of 1974 (ERISA). A federal law that set standards for plan sponsors and plan administrators in order to protect the rights of plan participants. ERISA is enforced by the U.S. Department of Labor.

  • Expense ratio

    The cost of owning a mutual fund that is deducted from your 401(k) account. Basically, it’s the amount you pay each year to the fund to cover operating expenses and management and 12b-1 fees. Expressed as a percentage of the net asset value of your investment in the fund. Expense ratios vary across the different types of funds.

    Look for the expense ratios in your 401(k) account statement, summary plan description, summary annual report, or your plan’s website. They also appear in the fund’s prospectus.

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  • Fiduciary responsibilities

    A fiduciary is any individual or group who makes decisions in administering and managing the 401(k) plan or who has the power to control the plan’s assets. Generally, a plan’s fiduciaries will include the trustee, investment managers, and the plan administrator. Under federal law, fiduciaries are subject to certain standards, called fiduciary responsibilities, because they act on behalf of the plan participants.

    Fiduciary responsibilities include:

    • Acting solely in the interest of plan participants
    • Selecting a diverse menu of investment options
    • Monitoring investment performance
    • Paying only reasonable expenses and fees for the plan
    • Providing adequate information to participants in a timely manner
  • Fixed-income investments

    Fixed-income investments pay a fixed rate of return in the form of interest or dividends. A bond is an example of a fixed-income investment. Fixed-income investments are generally less risky than equity investments (stocks).

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  • Investment

    Money that is put at risk for the purpose of making a future profit. There are many types of investments, but the most common are stocks, bonds, mutual funds, and real estate. Your 401(k) plan will offer a menu of investment choices, which usually include stock and bond mutual funds, money market funds, and your company’s stock.

  • Investment menu

    The selection of investment choices offered by your 401(k) plan. Most plans offer a menu of mutual funds, including stock funds, bond funds, and money market funds. Your plan may also offer company stock or a brokerage window account.

  • IRA

    Individual Retirement Account. IRAs are personal retirement plans that allow you to select your own investments and make elective contributions (up to certain annual limits). Unlike 401(k) plans, IRAs are not sponsored by employers.

    Traditional IRA. Like 401(k) plans, traditional IRAs offer tax-deferred savings for retirement; annual contributions and earnings are not taxed until you withdraw the money. IRA contributions may be tax-deductible depending on your income, tax-filing status and other factors.

    Roth IRA. An Individual Retirement Account that allows you to withdraw the money tax-free at retirement. Contributions are not tax-deductible, but your money grows tax-free and you won’t ever pay taxes on the earnings. To qualify to contribute to a Roth IRA, your income must be less than the limits set by federal law.

    Rollover IRA. An Individual Retirement Account that holds money transferred from a 401(k) account.

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  • Lump-sum distribution

    A one-time payout of the entire balance of a retirement account. When you retire or leave your job, you can take a lump-sum distribution of your 401(k) in cash, but you will owe income taxes on the amount, plus a 10% penalty if you’re under age 59 ½. To avoid a tax hit, you can roll the lump-sum distribution over to your new employer’s plan or to an IRA; you won’t pay taxes until the money is withdrawn.

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  • Mutual fund

    An investment company that pools together money from many investors and then invests the money in stocks, bonds, or other securities.

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  • Net asset value (NAV)

    The total value of all holdings owned by a mutual fund divided by the number of shares outstanding. This is the price at which you can buy and sell shares of the fund. The NAV is calculated daily.

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  • Plan administrator

    The company or person selected by your employer to manage the 401(k) plan. The plan administrator could be your employer (an HR manager or benefits department manager, for example), or it may be an outside company hired for the purpose.

    The plan administrator manages the day-to-day operations of the plan, including enrollment, investment selection, loans and withdrawals, and distribution requests. The plan administrator is usually the best starting point for questions you have about your company’s plan.

  • Plan fiduciary

    Any individual or group who makes decisions in administering and managing the 401(k) plan or who has the power to control the plan’s assets. Under federal law, fiduciaries are subject to certain standards, called fiduciary responsibilities, because they act on behalf of plan participants.

  • Plan participant

    An employee or former employee who participates in a 401(k) plan.

  • Plan provider

    A financial services company that provides your 401(k) plan’s investments. It could be a mutual fund company, a brokerage firm, or an insurance company. Plan providers also offer plan administration and recordkeeping services, though your employer may hire a separate company to act as plan administrator.

  • Plan sponsor

    An employer that offers a 401(k) plan to employees. The plan sponsor chooses the 401(k) plan, the plan provider, and the plan administrator.

  • Prospectus

    A document that provides important information about a mutual fund, including the fund’s objectives, investments, risk level, and expenses and fees. Be sure to carefully review the prospectus before you invest in a mutual fund.

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  • Qualified Domestic Relations Order (QDRO)

    A court order that allows a spouse, former spouse, child, or other dependent to receive all or a portion of a plan participant’s 401(k) benefits.

  • Qualified plan

    A retirement plan that meets IRS rules and regulations in order to qualify for favorable tax treatment. A 401(k) is a qualified plan in which contributions are tax-deductible, and taxes on earnings are deferred until the money is withdrawn.

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  • Required minimum distribution (RMD)

    The amount you must withdraw from your 401(k) account each year once you reach age 70 ½. If you work beyond age 70 ½ and own less than 5% of your company, you can defer RMDs until you retire.

    Your RMD amount is calculated using factors such as your life expectancy and account balance. Although your plan administrator may calculate your RMD, you (the participant) are ultimately responsible for calculating your RMD and for taking the correct amount on time every year from your account.

  • Return

    The gain or loss of an investment in a given period, usually expressed as a percentage.

  • Risk

    The chance that an investment, such as a 401(k) account, will lose value. Some investments are riskier than others. Stocks carry more risk than bonds and cash investments. Risk is related to return: The more risk you are willing to take with your money, the more potential there is for a high return—and also for a loss.

  • Risk tolerance

    How comfortable you are with the possibility of your investments losing value. In general, your risk tolerance has to do with how much time you have before retirement. When you are younger, you may be more comfortable taking on aggressive, riskier investments. As you near retirement, you may want less risky investments.

  • Rollover

    When you transfer (or “roll over”) money from a 401(k) account to an IRA. This allows you to keep the tax-deferral benefits of a 401(k) when you change jobs or retire. You don’t pay any taxes on the money that is transferred, and your money continues to grow tax-free. To avoid a 20% tax withholding penalty, the rollover must take place directly from one custodian to another.

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  • Safe Harbor 401(k) plan

    Similar to a regular 401(k) plan, but the employer is required to make contributions for each employee–either matching contributions or a 3% contribution to all participants. The employer contributions are immediately 100% vested. The Safe Harbor 401(k) makes it easier for employers by eliminating some of the complex tax rules applied to traditional 401(k) plans.

  • Salary deferral

    The portion of your salary that is deducted and placed in your 401(k) account rather than included as take-home pay. Expressed as a percentage or dollar amount.

  • SIMPLE 401(k) plan

    Savings Incentive Match Plan for Employees. This is a simplified 401(k) plan for businesses with 100 or fewer employees. The employer is required to make minimum annual contributions for each participant, and the employer contributions are immediately 100 percent vested. SIMPLE plans reduce the administrative burdens on employers.

  • Stock

    An ownership share of a company. When you buy shares of stock in a company, either directly or through a mutual fund, you own a piece of the company.

  • Summary annual report (SAR)

    A report that summarizes the financial status of a 401(k) plan. Federal law requires that companies must provide a summary annual report to plan participants every year.

  • Summary plan description (SPD)

    A document that summarizes the key features of a 401(k) plan in plain language. A shorter version of the plan document, it includes information such as plan eligibility, employer matching contributions, vesting, participant rights, hardship withdrawals and loans, and filing for benefits. By federal law, every participant in the plan must receive a summary plan description within 90 days of becoming a participant. Always read your summary plan description for important information on how your plan works.

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  • Tax-deferred retirement account

    A retirement account in which payment of taxes is delayed until the money is withdrawn. Examples include IRAs and employer-sponsored plans such as 401(k)s.

  • Thrift Savings Plan (TSP)

    A retirement savings plan for employees of the U.S. government and members of the uniformed services. Like a 401(k), it is a defined contribution plan, in which an employee makes regular contributions to an individual account.

  • Total return

    Your gain or loss on an investment in a given year. Usually expressed as a percentage.

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  • Vesting

    When your employer matching contributions become yours to keep after a period of time, according to your employer’s vesting schedule. Employers use vesting in order to encourage employees to stay; if you leave your job before the employer contributions have vested, you lose them. Note that your own 401(k) contributions are always yours to keep and require no vesting.

  • Vesting schedule

    How long you need to wait before your employer matching contributions become yours to keep. Employers use vesting in order to encourage employees to stay; if you leave your job before the employer contributions have vested, you lose them. Note that your own 401(k) contributions are always yours to keep and require no vesting.

    There are different types of vesting schedules:

    Cliff vesting. Employer contributions are fully vested after a specific period of time, in three years or less.

    Graduated vesting. Employer contributions are fully vested gradually in increments, over six years at the most.

    Immediate vesting. Employer contributions are fully vested as soon as they are deposited.

    You can find your plan’s vesting schedule in the summary plan description.

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