401(a) Plan – A retirement savings plan set up by an employer that allows for contributions by the employee, the employer, or both. Contribution amounts may be dollar-based or percentage-based. The sponsoring employer sets the level of these amounts as well as eligibility and vesting schedule, and may establish more than one plan, each to serve the needs of a distinct group of employees.
401(k) Plan – A defined contribution plan usually sponsored by a private sector employer, governed under Section 401(k) of the Internal Revenue Code, and intended primarily for long-term retirement saving. Typically, employees (“participants”) contribute pre-tax money each payday into an annuity or a custodial trust account set up for them by the 401(k) plan, and invest that money so that it can grow tax-deferred. When a participant withdraws money from the plan, it’s taxed as ordinary income. However, if the plan offers a Roth option, participants may elect to designate some or all of their contributions to be made with after-tax dollars, allowing them to take withdrawals tax-free, subject to certain rules and regulations.
402(f) – Notice that participants taking a systematic withdraw from their plan will receive annually. The plan sends detail options for both Roth and non-Roth rollover distributions, pursuant to the IRS code.
403(b) Plan – A defined contribution plan similar to a 401(k) plan, but one which is sponsored by public schools and universities, some nonprofit employers and cooperative hospital service organizations. It gets its name from the Internal Revenue Code section that governs it. Typically, employees (“participants”) contribute pre-tax money each payday into an annuity or a custodial trust account set up for them by the 403(b) plan, and invest that money so that it can grow tax-deferred. When a participant withdraws money from the plan, it’s taxed as ordinary income. However, if the plan offers a Roth option, participants may elect to designate some or all of their contributions to be made with after-tax dollars, allowing them to take withdrawals tax-free, subject to certain rules and regulations.
403(b) Tax-Sheltered Annuity Plan – A 403(b) plan that uses an annuity to maintain participant accounts.
457(b) Plan – A defined contribution plan for governmental employees that is governed under Section
Note: Certain non-governmental employers may establish 457(b) plans. However, these plans are under separate rules and regulations and are not interchangeable with governmental 457(b) plans.
5-year option – A 60-month automatic exchange or transfer program that allows participants to move 100% of the balance of a fixed fund over a 60-month period. A portion of the balance is automatically moved every month for 60 months to the participant’s variable investment election.
Account Accuracy Rule – Relates to the FACTA of 2003, the act that addressed identity theft concerns. FACTA allows consumers to request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion).
Adjustment – Financial transaction initiated by a fund company or employer used to correct a participant's account balance. Includes the following: daily interest, dividends, capital gains, unit adjustments, bad price or price conversions, payroll adjustments, and fund reimbursements.
Allocation – The way in which deferrals, or contributions, are divided among existing investments.
Allocation Change – When a participant moves future contribution percentages into another fund or mix of funds.
Annual Contribution Limit – Maximum a participant can contribute, or defer, to a 401k, 403b and/or 457b plan account(s) or IRA in a tax year. The IRS sets contribution limits annually.
Annualized Return – Rate of return for a given period that is less than one year, but computed as if the rate were for a full year.
Annuity – Financial product designed to accept, invest and grow money from an individual and then, at some later point in time, pay out a stream of payments to the individual. In the retirement plans context, annuities are used to house participant accounts with 457(b), 403(b) and 401(k) plans. Because they are operated for the benefit of a group of participants, they are known as group annuities.
Asset Allocation – Strategy of spreading investment funds across asset classes, such as cash and fixed income, bonds, and stocks, to help minimize risk. This may help manage the risk of investing in part because these investment categories respond to changing economic and political conditions in different ways. The use of asset allocation does not guarantee returns or protect from potential losses.
Asset Classes (Types) – Types of investments available for participant contributions and assets. In general, asset classes may be divided into stocks, bonds, cash and cash-like products including money market instruments, Treasury bills and CDs. Retirement plans typically offer mutual funds comprised of stocks, bonds, cash or a mixture of them.
Asset Management Charge – An administrative charge taken as a percentage of assets held by the retirement plan. The purpose of the charge is to cover the expenses/costs of plan education, marketing, recordkeeping and administration services.
Asset Rebalancing – An investing strategy through which a participant periodically exchanges or moves between funds in their account, in an effort to maintain a specific investment mix designated.
Automatic Asset Rebalancing – Optional service commonly offered by retirement plan administrators to help participants gain the benefits of asset rebalancing automatically.
Back-End Load – Redemption charge an investor pays when redeeming shares. Usually found in mutual funds and annuities, it’s designed to discourage withdrawals and usually declines over a period of years before eventually expiring.
Basis Point – Common units of measure when quoting fixed account yields, interest rates and retirement plan charges and expenses. One basis point equals .01%, therefore 100 basis points equals 1%.
Beneficiary – The recipient of, or person chosen to receive, designated assets in the event of another’s death.
Bonds – Loans or debt instruments issued by governments or corporations to raise money. These instruments are issued for a stated period, during which interest payments are made to the bondholder. Bonds may be bought or sold, and may gain or lose value, as investment property.
Capital Appreciation – A rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.*
Capital Gains Distribution – Mutual fund distributions, or profits, paid to shareowners from the sale of stocks and/or bonds.
Capitalization (Cap), or Market Capitalization – The total market value of all of a company’s outstanding shares. Often abbreviated as cap. Small-cap generally refers to a company with market capitalization of between $300 million and $2 billion. Mid-cap, between $2 and $10 billion. Large-cap, more than $10 billion. Many mutual funds are categorized based on the average market capitalization of the stocks that they own.
Cash Equivalents – Short-term, liquid investments like a mature money market instrument or bank savings account. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. It is possible to lose money by investing in a money market fund.
Catch-Up Contributions – There are two types - the Age 50+ Catch-Up Provision says 457b, 403b and 401k plans may allow participants age 50 and over to contribute up to $5,500 more than the maximum contribution limit annually. As an alternative, 457b and 403b plans may allow a one-time Special 457 Catch-Up contribution. To learn more, visit www.irs.gov.
Certificates of Deposit (CDs) – Savings certificates issued by banks and insured by the FDIC. They can be issued in any denomination and offer a fixed interest rate payable at a specified maturity date.
COLA – Cost of living adjustments.
Common Stock – A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debt holders have been paid in full.*
Consumer Price Index (CPI) – Also known as the CPI or Cost-of-Living-Index. Released monthly by the US Department of Labors’s Bureau of Labor Statistics, it measures prices of a fixed basket of goods bought by a typical consumer in the United States. Goods include food, transportation, shelter, utilities, clothing, medical care, entertainment, etc.
Contingent Deferred Sales Charge – Also known as a back-end load. An investment company or annuity issuer may charge a percentage of money withdrawn early in the contract to compensate for the high cost they incur when setting up the account. The CDSC percentage typically goes down over time and goes away altogether, when the defined period for the contract is reached.
Contribution – Portion of the account holder’s paycheck that is invested into a retirement plan.
Contribution Change – Refers to the pre-tax dollar or percentage amount that’s deposited from a participant’s paycheck to invest in a deferred compensation account.
Core Account – Portion of a participant’s account that is invested in funds offered by a retirement plan. The term is used primarily by plans that offer a self-directed brokerage option to distinguish assets a participant holds “inside the plan” from assets held in the brokerage account.
Corporate Bond – Bonds that are issued by corporations. They may offer higher returns than government bonds in exchange for higher risk. Generally, the higher the credit rating of the company, the lower the interest rate paid to the investor.
Correction – A drop in the stock market in a short period of time. A stock market correction typically occurs following a sharp increase or a negative event.
Deferred Compensation – A plan in which a portion of an employee's earned income is paid out at a later date. Examples of deferred compensation include pensions, retirement plans like a 457, 403(b), or profit sharing plan, and stock options. The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee actually receives the income.
Deferred Compensation Plan – Type of retirement plan in which the employer allows employees to contribute a portion of their income to invest in options offered by the plan. Contributions can grow tax-deferred until withdrawal, when the money is taxed as ordinary income.
Defined Benefit Pension Plan – Employer-sponsored retirement plan that promises to pay a specified benefit to each person who retires after a set number of years of service. These plans do not pay taxes on their investments and in some cases, employees contribute.
Defined Contribution Pension Plan – Employer-sponsored retirement plan in which the amount of the annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings.
Deflation – Opposite of inflation, it is the decline in the prices of goods and services. A period of deflation usually has a negative effect on production and employment.
Depression – A severe and prolonged recession, a depression is an economic condition characterized by falling prices, excess of supply over demand, rising unemployment, accumulating inventories, decrease in purchase power and general public fear.
Direct Deposit (Electronic Fund Transfer or EFT) – Many employers direct deposit employees’ pay into a bank account, rather than issuing paper checks.
Distribution – Amount paid out of plan accounts, also called a payout or payment.
Diversification – Portfolio strategy designed to spread risk by allocating assets among a variety of investments, such as short-term investments, bonds and stocks.
Dividend – Earnings paid by a company to its stockholders, typically paid in cash or stock. Dividends may be paid monthly, quarterly, or annually.
Dividend Yield – Portion of what a mutual fund earns from its holdings, stated as an annualized percentage of the fund’s current market price. A quarterly dividend would be equal to one-fourth of the percentage stated in an investment report or prospectus.
Dollar Cost Averaging – Investment strategy that invests fixed amounts at set intervals, such as monthly or bi-weekly. Over the long term, a particular investment is purchased with a fixed dollar amount on a regular schedule, regardless of the share price. This assumes more shares are purchased when prices are low, and fewer shares are bought when prices are high.
Earned Income – Money earned from salary, wages, bonuses, commissions and tips, as a result of providing goods and/or services.
Earnings – Money gained on the principal in a financial account.
Effective Date – Date on which an agreement or transaction, such as a contract or insurance policy, takes effect. With transactions, some companies require that they must be submitted by the close of the New York Stock Exchange (NYSE) – normally 4 p.m., ET to be effective on that day. After that time, transactions are usually not effective until the next business day the NYSE is open.
Eligible Rollover Distribution – A distribution from a 401k, 403b, or 457 plan or an IRA that is legally eligible to be rolled over to another 401k, 403b, or 457 plan or an IRA.
Employer Contributions – Contributions made by the employer for the employee. Includes Employer Discretionary Account, Employer Match and Employer Money Purchase.
End-Result Exchange – Reallocating your current balance changes the investment mix of your portfolio and is sometimes referred to as an end-result exchange. It's an easy way to manually rebalance your entire portfolio without exchanging one fund at a time.
Equity – In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.*
Equity Wash – Refers to participant exchanges that must be exchanged into mutual funds that are not competing funds, and must be held in such non-competing mutual funds for at least 90 days before being transferred to a competing fund.
ERISA – The Employee Retirement Income Security Act of 1974, a law governing the operation of most private pension and benefit plans including 401k and 403b plans. ERISA protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire. For more information, visit https://www.dol.gov/general/topic/health-plans/erisa.
Estate – Legal term for the sum of the assets and liabilities for an individual, generally used after the death of an individual.
Estate Planning – Advance planning for how to manage an estate when the owner dies. This is often done years in advance to ensure that the owner’s wishes are met. It can include setting up trusts, planning a will, buying life insurance to cover expenses triggered at death, and coordination of tax liability.
Exchange – Moving the current account balance from one investment choice to another choice(s) available through the same plan.
Expense Ratio – The expense ratio is the annual fee that all mutual funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the mutual fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the mutual fund's average net assets, is accrued on a daily basis. It should be taken into consideration when choosing mutual funds.
FDIC Insured – Refers to accounts that are insured by the Federal Deposit Insurance Corporation, a U.S. government agency that insures cash deposits placed in member institutions. The basic insured amount for each depositor is capped at $250,000 for losses of cash in all accounts the depositor has with the member institution where the loss occurred.
Financial Industry Regulatory Authority (FINRA) – Largest independent regulator for all securities firms doing business in the United States. FINRA’s mission is to protect America’s investors by making sure the securities industry operates fairly and honestly.
Fixed Immediate Annuity – Investment contract sold by an insurance company that guarantees fixed payments, either for life or for a specified period (such as 15 years). The insurance company guarantees both earnings and principal, but guarantees are subject to the claims-paying ability of the issuing insurance company.
Flexible Premium Policy – A policy that after the initial premium allows the policy owner to select the frequency and amount of the premiums going forward. Typically flexible premiums are used in variable universal life and universal life policies. This is opposite of a whole life insurance policy which usually has a fixed premium.
Fund Expense Ratio – See Expense Ratio.
Gross Domestic Product (GDP) - Total value of goods and services produced in a country in one year.
Immediate Annuity – Single premium annuity that starts to pay the annuitant immediately after purchase. Often used as a retirement plan payout option, proceeds from the individual’s plan account are used to purchase the annuity. Then, the annuity provides the individual with ongoing income, usually paid monthly.
In-Service Withdrawals – Withdrawal from a retirement plan that occurs before retirement. Most companies charge a penalty fee for in-service withdrawals to discourage plan participants from taking money out of their plan before retirement.
Index – A stock market index is a benchmark that provides a point of reference for evaluating performance of a portfolio. Some of the more common indices include the S&P 500 and the Dow Jones Industrial Average.
Individual Retirement Account (IRA) – Retirement accounts owned and funded by an individual. Two common types of IRAs are traditional IRAs and Roth IRAs. Contributions to a traditional IRA are eligible for a credit when the individual files a federal income tax return. Withdrawals are taxed as ordinary income. Contributions to a Roth IRA are not eligible for a tax credit, but withdrawals may be taken tax-free (subject to certain conditions and restrictions).
Inflation – Persistent and measurable rise in the general prices of goods, services, materials, etc.
Interest – Fee charged by a lender to a borrower for the use of borrowed money. It’s commonly expressed as an annual percentage of the principal, and is determined by the time value of the money, the perceived credit risk of the borrower, and the projected rate of inflation.
Internal Revenue Code (IRC) – Body of law containing federal tax provisions, including those that govern or impact 457b, 403b, 401k and 401a plans, IRAs and defined benefit pension plans. References to specific section numbers in more formal documents are often preceded by §, as in IRC §457(b) for Section 457(b) of the Internal Revenue Code.
Internal Revenue Service (IRS) – The U.S. government agency responsible for tax collection and tax law enforcement.
Investment Objective – Defines a mutual fund’s investment goals. The mutual fund’s investment objective is spelled out in the fund prospectus.
IRA Transfer – Custodian-to-custodian transfer of an IRA. The owner does not take possession of the assets – they’re transferred directly from one plan custodian to another.
Joint Account – Account where two or more individuals exercise some control over the account. It must be registered as either Joint Tenants in Common or Joint Tenants with Right of Survivorship.
Joint Tenants in Common – Type of joint account registration where the percentage of the account owned by a person is distributed to his estate upon his death. Example: Person A and Person B own a joint tenants in common account. If person A dies, then 50% of the account is included in Person A’s estate.
Joint Tenants with Right of Survivorship – Type of joint account where the deceased owner’s percentage of the account passes to the other surviving owner(s), commonly used between husband and wife.
Keogh Plan – Qualified retirement plan for self-employed and unincorporated investors.
Letter of Intent – Signed agreement between an investor and a mutual fund company. The investor receives a reduced sales charge on funds by agreeing to purchase a stated dollar amount of shares.
Liquid Asset – An asset, such as a bank savings account, that can be converted into cash quickly and with minimal impact to the price received.
Loan – An optional provision available to retirement plan sponsors. If adopted by the sponsor, participants may request to borrow money from their retirement account. Repayment is typically made through an Automated Clearing House (ACH) directly from the participant’s bank account to the retirement account.
Loan Principal – The amount borrowed – interest is calculated on the principal.
Long-Term Gain – Profit earned from the sale of a security held longer than 12 months.
Mandatory Employee Pre-Tax Contribution – Employee’s contribution made upon condition of employment and picked up by the employer under Internal Revenue Code (IRC) Section 414 (h).
Market Capitalization (Cap) – Total market value of all of a company’s outstanding shares. Often abbreviated as cap. Small-cap generally refers to a company with market capitalization of between $300 million and $2 billion. Mid-cap, between $2 and $10 billion. Large-cap, more than $10 billion. Many mutual funds are categorized based on the average market capitalization of the stocks that they own.
Market Timing – The frequent movement between and among mutual funds to potentially capitalize on perceived or anticipated market trends. Market timing does not ensure profitability and, because it often operates to the detriment of other investors, fund managers may assess fees on sales of funds held for short periods.
Matching Contribution – A contribution made by an employer to an employee's defined contribution retirement plan account. Typically, the employer makes the contribution to a 401a plan account in the employee's name, based on elective deferral contributions made by the employee to a 457b, 403b or 401k account. This arrangement preserves the employee’s ability to make maximum contributions to his plan account regardless of any employer contribution.
Maximum Deferral – Largest amount a participant can invest annually. These limits are established by the IRS.
Money Market Account (MMA) – Mutual fund that invests primarily in low-risk, short-term investments such as treasury bills, government securities, certificates of deposit and other highly liquid, potentially safe securities.
Morningstar® – Independent mutual fund rating service that provides information on mutual funds, including performance history and other investment data.
Mutual Fund – Professionally managed investment vehicle that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. The fund is overseen by a board of directors or trustees charged with ensuring that it is managed in the best interests of investors, and with hiring the mutual fund manager, who buys and sells assets in accordance with the mutual fund's investment objective. Because a mutual fund buys and sells a large number of investment shares at a time, management costs are designed to be lower per investor than they would be if an individual investor purchased individual stocks and bonds.
Net Asset Value (NAV) – Regarding mutual funds, it’s the market value, or price, of a share. It’s calculated daily by dividing the total net assets of the mutual fund by the number of shares outstanding.
Normal Retirement Age (NRA) – Age at which a participant in a retirement plan can retire and receive unreduced benefits. Some deferred comp plans define a retirement age range within the Plan Document and let the participant choose when to retire; other plans choose the date for the participant.
Payout – Payment from a 457b, 403b or 401k plan or a defined benefit pension plan – also called a distribution. Examples include disbursements, loans, rollovers to another plan and separation from service payments.
Payroll Frequency – How often your regular paycheck is issued – daily, weekly, bi-weekly (once every two weeks), bi-monthly (twice per month), etc.
Performance Benchmark – Index used to evaluate a mutual fund’s performance.
Plan Document – A collection of documents that, taken together, officially define the plan and specify how it is to be governed and operated.
Portfolio – Collection of investments owned by the same individual or organization.
Post-Tax – Paycheck contribution made to a retirement plan after taxes have been paid on the amount.
Pre-Tax – Paycheck contribution made to a retirement plan prior to taxes being paid on it.
Preferred Stock – A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares."*
Prime Rate – Interest rate commercial banks charge their best clients - generally large corporations. Many consumer loans, such as mortgages, automobile and credit card loans are tied to the prime rate.
Principal – Money contributed to a financial account, such as a 457b or 401k plan.
Prospectus – Legal document offering securities or mutual fund shares for sale. Federal and state securities regulators require that the prospectus includes the fund’s investment objectives, policies and restrictions, fees and expenses, and the process for buying and selling shares. It should be read carefully before investing.
Purchase Block – An action taken by a mutual fund manager to prevent certain investors, including retirement plan participants, who move $5000 or more out of its mutual fund in a single day (by way of exchange or restructure), from moving $5000 or more back into the same mutual fund for a period of 30 days. This is to prevent frequent trading, which tends to increase costs to all investors in the fund.
Qualified Domestic Relations Order (QDRO) – Divorce judgment, decree or order that relates to the provision of child support, alimony payments or marital property rights. This judgment may include a spouse, former spouse, child or other dependent of the employee, and may affect the disposition of or rights to assets in a participant's 457b, 403b or 401k plan account.
Qualified Plan – A plan that meets requirements of the Internal Revenue Code (IRC) to be eligible to receive certain tax benefits. A key IRC provision governing these plans is that they must exist and operate "for the exclusive benefit of participants or their beneficiaries." Employer-sponsored defined benefit and defined contribution plans, including governmental 403b and 401k plans, are qualified plans. 457b plans are not technically qualified plans but share most of the same tax characteristics of qualified plans.
Rate of Return – Percentage of change in an investment, including appreciation or depreciation and dividends or interest, over a given time period. Most rates of return of funds within a retirement plan are expressed on an annual basis (“annualized”), unless stated otherwise.
Reallocate – Process of rebalancing the investment mix of an entire portfolio instead of exchanging one mutual fund at a time. Participants may reallocate their account when they get closer to retirement, to potentially invest in less aggressive mutual funds, for instance.
Rebalance – A strategy to sell investments that have been performing well and invest more into those that have fallen behind – a buy low, sell high approach. It won't change how future contributions are invested and is sometimes referred to as an end-result exchange.
Recession – General economic decline that generally lasts from six to eighteen months.
Required Minimum Distribution (RMD) – Distribution amount that must be paid to a participant in a public retirement plan. U.S. Dept. of Treasury and IRS regulations generally require that participants begin taking an annual RMD by April 1 of the year after they reach age 72 or the year in which they retire, whichever is later. There are also RMD requirements for beneficiaries.
Risk Tolerance – Degree of uncertainty that an investor can handle in regards to a negative change in the value of his or her portfolio.
Rollover (Pre-Tax) – Amounts transferred to the plan from an eligible retirement plan or IRA. Reinvestment of assets into an IRA that an individual receives from a qualified tax-deferred retirement plan. It must be reinvested into an IRA within 60 days to avoid tax and penalties.
Roth Contributions – Roth contributions are designated employee after-tax pay that’s contributed to a participant’s 401k, 403b or governmental 457 plan account. Subject to certain restrictions, distributions of earnings from the Roth account may be taken tax-free. There are several different types of Roth accounts: IRAs, 457b, 401k and more.
Rule of 72 – A calculation used to estimate how many years it will take an investment to double in value. To use the Rule of 72, divide 72 by the assumed rate of return of the investment. For example, if $1,000 is invested at an 8% annual rate of return, the money may double in nine years. Since variable investments fluctuate in value, there can be no guarantee how long it will take to double the money.
Salary Reduction – Contributions an employee makes to a employer-sponsored retirement plan.
Separate Account – Privately managed investment account that uses pooled money to buy individual assets. It is similar to a mutual fund. However, in a retirement-plan context, while a mutual fund is available to the general public, a separate account is available only to participants of the plan that sponsors it.
Short Term Redemption Fee – Redemption charge common in mutual funds (especially International funds). It usually lasts for 3, 6, or 12 months from the time shares are purchased and commonly is limited to a small amount (1, 2, or 3%) if shares are sold within that timeframe.
Short-Term Capital Gains – Profits from the sale of a stock and/or bond held for one year or less.
Short-Term Investments – Short-Term Investments include two basic underlying asset types: (1) cash, which refers to short term securities, such as bank certificates of deposit (CDs) and money market funds and (2) fixed income, which includes securities issued by the U.S. Government, U.S. Agencies, corporate bonds, residential and commercial mortgage-backed securities, and other asset-backed securities. Typically, short-term investments encounter less market risk than do stocks, diversified real return, and bonds because of their short duration. Therefore, they usually provide a lower rate of return than investments in those categories.
Single Premium Deferred Annuity (SPDA) – Type of annuity contract that is established with a single lump-sum payment by the owner which may grow on a tax-deferred basis until annuitized. An SDPA may be either fixed or variable, distributions are only taxed when you take them and there are no investment limits.
Spousal IRA – An IRA account set up for a non-working spouse (no earned income) of a working spouse. Up to $5,000 a year can be contributed to this account.
Stock Market – Commonly referred to in the singular form "market", all stock markets are auctions, where traders come together to buy and sell ownership shares in companies, investment bonds, and other investment items. Some of the largest stock markets include The New York Stock Exchange, The Chicago Mercantile Exchange, The NASDAQ and The London Stock Exchange. Similar to most auctions, prices are driven by supply and demand, the real or perceived value of the item and/or emotion. It's for this reason that prices continually change on the market.
Systematic Withdrawal Plan – Plan where a fixed dollar amount or percentage is redeemed from a retirement account at regular intervals (monthly, quarterly, etc.). This plan is popular with retirees who will have a certain amount redeemed from a mutual fund or retirement plan on a regular basis, while keeping their remaining assets in the fund or plan.
Tax-Deferral – Pre-tax money invested now to grow tax-free until money is withdrawn, at which point taxes will be assessed. Used to help people save for retirement in both the public and private sector.
Term Life Insurance – Policy with a set coverage period or duration. There is no cash value and no underlying investment.
Time Horizon – The number of years until a participant retires and/or begins to take distributions from their retirement plan.
Total Return – Return on an investment, including income from dividends and interest. Includes appreciation or depreciation in the price of the security, over a given time period.
Transaction Types – Identifies how money came into or moved out of a deferred compensation account, such as contributions, exchanges, distributions, fees, loan repayments and more.
Trust – Legal arrangement through which title to assets is given to one party to manage for the benefit of others. Under Internal Revenue Code regulations, defined contribution retirement plan assets must be held in a trust or an annuity established for the benefit of participants or their beneficiaries.
Trustee – Person(s) legally appointed to act on behalf of a beneficiary or a trust. Often times, an employer acts as a trustee for a retirement plan.
Underlying Funds – The investments in a mutual fund, a variable annuity's separate account fund or other fund.
Unearned Income – Income from sources other than salary or wages from employment. They include interest income and capital gains, among other forms income.
Unforeseeable Emergency – A severe financial hardship, as defined by a governmental 457b deferred compensation plan. While the plan document may add further criteria, an unforeseeable emergency must be defined in the plan as (1) a severe financial hardship of the participant that results from illnesses or accidents of the participant, their spouse or a dependent, (2) unreimbursable loss of the participant’s property due to casualty, or (3) other similar extraordinary and unforeseeable circumstances that arise as a result of events beyond the participant’s control.
Universal Life Insurance – Flexible permanent life insurance combining the low-cost protection of term life insurance and a savings element (like whole life insurance) invested to provide a cash value buildup. Allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.
Unrealized Capital Gains – Positive difference between a securities value and cost basis. For mutual funds, the cost basis is the amount on which the owner has already paid taxes. If the fund is sold, the unrealized capital gain is the difference between the sale amount and the cost basis, and is not paid out in a retirement plan. Unrealized capital gains are only paid on non-qualified assets.
Variable Annuity – Contract between an investor and an insurance company, where the investor or participant makes a lump-sum payment or series of payments. Participants may choose to invest payments in different investment options, typically mutual funds.
Variable Universal Life Insurance (VUL) – Life insurance policy that builds a cash benefit and guarantees a minimum death benefit to be paid to the policy's state beneficiaries, as long as there is sufficient cash value. The cash value or benefit of a VUL may be invested in separate accounts as determined by the contract owner.
Voice Response System (VRS or VRU) – Automated phone system that allows you to access your account information, perform account transactions, and request materials. Account access requires a personal identification number (PIN).
Whole Life Insurance – A life insurance contract with both an insurance and an investment component. The insurance component may pay a stated amount upon death of the insured; the investment component accumulates a cash value that the policyholder can withdraw or borrow against.
Withdrawal – Also called a distribution, a withdrawal is money taken from a financial account, such as 457b, 403b or 401k plan account or an IRA. In most situations, participants of a 457b plan who have left employment of the plan sponsor may take distributions from their plan without penalty, regardless of age. Distributions from 401k and 403b plans made prior to age 59½ may be subject to a tax penalty.
Yield – Rate at which an investment pays out interest or dividend income, expressed in percentage terms. It’s calculated by dividing the amount paid by the price of the security and annualizing the result.
* Dictionary definitions, retrieved March 21, 2012 from www.investopedia.com