Annual Required Contribution Employer contributions that are required by law to be made annually. (For example, SIMPLE-IRA’s require that the employer make a contribution to participant accounts for a particular plan year).

Asset Allocation The mix of investments within your financial plan. Generally, assets should be invested in a combination of investment options ranging from conservative to aggressive. In most cases, the most appropriate mix varies depending on age and willingness to accept risk in exchange for the chance to earn greater earnings.

Asset Class A category of investments, such as stocks, bonds, or cash equivalents.

Automatic Enrollment Safe Harbor 401(k) Employers can offer Automatic Enrollment 401(k) Plans, which automatically enroll all employees (unless they opt out) and deduct contributions from their paychecks.

Balanced Fund A mutual fund that invests in a combination of asset classes (usually stocks and bonds and, in some cases, cash equivalents). Balanced funds seek to provide growth and income.

Benchmark A standard against which an investment’s performance can be compared, often an index of securities in the same asset class as the investment.

Beneficiary Elections If provided for under the plan, the participant’s written designation of the person who will receive the participant’s benefit upon the participant’s death.

Board Resolution The written document signed by the company’s board of directors taking some formal action.

Bond The debt instrument (or “IOU”) of a corporation or government entity that promises to pay the investor a specified amount of interest for a specified time period, with principal to be repaid when the bond matures.

C Corporation An entity established to conduct business and taxed separately from the business owner. The state in which you incorporate will set the guidelines for incorporation.

Compounding The overall gains experienced when the returns and interest paid on your investments remain in those investments and begin to earn returns and interest on themselves. Compound interest is the interest paid on both the principal and reinvested interest.

Contributions Payments made to a retirement plan to fund the retirement benefit. Generally, contributions are made by the employee or the employer or both.

Defined Benefit Plan A defined benefit plan is a type of plan that promises to pay participants a specified periodic benefit (usually monthly) beginning at retirement and continuing over a period of time, usually for the rest of the participant’s life. The plan may state this promise as an exact dollar amount, such as $100 per month, or, more commonly, it may calculate the benefit through a formula that takes into account such factors as salary and service. (For example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer). Defined benefit plans do not involve individual participant accounts, and they are usually funded exclusively through employer contributions. The assets of the plan are held in trust or invested in insurance contracts and are used to pay the benefits when they come due.

Defined Contribution Plan A retirement plan providing an individual account for each participant. The participant’s benefit is the balance in the account, which changes over time, based on the amounts contributed, plus or minus any gains or losses in investments. The employer chooses whether or not participants direct the investment of their accounts.

Diversification The practice of spreading money among different investments to reduce risk, such as investing in different companies in various industries or in several different types of investments. Diversification does not ensure a profit or protect against loss in a declining market.

Dividend A distribution of earnings to shareholders.

Dollar Cost Averaging Investing a fixed amount of money in a specific investment at regular intervals, regardless of market conditions or prices. More shares are purchased when prices are low and fewer shares are purchased when prices are high. In a fluctuating market, the average cost per share is generally lower than the average price per share.

Employee Contributions The contributions paid by an employee into an employer-sponsored retirement plan. If permitted under the plan, employees may contribute on a pretax or after-tax basis. Pretax contributions are usually funded through payroll deduction into a 401(k), 403(b), or SIMPLE plan. Generally, profit sharing plans, which may or may not include a 401(k) feature, may permit after-tax contributions.

Employer Contributions The contributions paid by an employer into an employer sponsored retirement plan. If provided for under the plan, employer contributions may be mandatory (fixed) or discretionary.

Employer Matching Contributions If provided for under the plan, employer matching contributions may be discretionary or mandatory. The matching contributions, paid by the employer, are calculated based on a matching formula tying them to another form of contribution. (For example, the employer match may be 50% of the first 3% of salary deferral into a retirement plan).

Expense Ratio A fund’s total annual operating expenses (including management fees, distribution (12b-1) fees, and other expenses) expressed as a percentage of average net assets.

Hardship Withdrawal If provided for under the plan, a participant may make a hardship withdrawal from his or her account before retirement due to a serious financial emergency.

In-service Withdrawals A feature of some retirement plans allowing participants to withdraw money from their account while they are still employed. In-service withdrawals may be subject to a 10% penalty tax if the participant withdraws the money before age 59 1/2.

Life Cycle Fund A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. Often called target-date fund.

Limited Liability Corporation Combines the more favorable characteristics of a corporation and a partnership. The LLC permits pass through taxation like a partnership while operating in a corporate-style structure, with limited liability as provided by the laws of the state of incorporation.

Limited Liability Partnership A partnership that is otherwise similar to a Limited Liability Corporation (LLC). This type of organization is favored and used for professional associations, such as attorneys and accountants.

Mutual Fund An investment that combines money from shareholders and invests it in numerous securities, including stocks, bonds, and short-term money market instruments. As open-ended investments, most mutual funds continuously offer new shares to investors.

Participant Loan A feature of some retirement plans allowing participants to borrow the lesser of up to 50% of their vested balance or $50,000. Certain restrictions apply, including the time period for repayment, the interest rate and who is eligible for a loan.

Partnership A legal relationship between two or more persons who join to conduct business with each contributing money, property, labor or skill. Each person receives a share in the profits or losses of the business.

Plan Document The written instrument setting forth the terms of a retirement plan. Each plan covered by ERISA (Employee Retirement Income Security Act) must have a written plan document.

Profit Sharing Plan Types of retirement plan under which an employer may, under the terms of the plan, make fixed or discretionary contributions. These contributions are subject to limits set by the Internal Revenue Code and may be — but are not required to be — tied to profits.

Qualified Retirement Plan Any type of retirement plan afforded special tax treatment because it meets the requirements set forth in the Internal Revenue Code.

Rebalancing Bringing a portfolio back to its original (or a desired) asset allocation mix.

Redemption Fee A shareholder fee that some mutual funds charge when investors redeem (or sell) mutual fund shares. The fee is typically applicable to redemptions made soon after purchase.

Return The interest or dividends, and gains or losses in the value of your principal.

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

Salary Deferral Agreement An agreement between an employee and employer allowing the employee to reduce his or her salary and have the employer deposit those reductions into a retirement plan. There are several types of plans that permit salary deferral arrangements, such as a 401(k), 403(b) or SIMPLE Plan.

S Corporation Corporations whose shareholders have elected to be taxed like a partnership, with profits and losses passing through directly to the shareholders, rather than to the corporation.

SEP-IRA (Simplified Employee Pension Plan) A type of retirement plan with individual IRA accounts for each participant. The employer funds the retirement benefit by making contributions that are remitted directly to the IRA accounts. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 25% of an employee’s annual salary, or an annually adjusted maximum ($46,000 in year 2008). All contributions are immediately 100% vested.

SIMPLE-IRA (Savings Incentive Match Plans for Employees of Small Employers) A type of retirement plan that allows employees to make pretax employee contributions to an IRA and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $10,500 ($13,000 for those age 50 and over) each year by payroll deduction. Employers can either match employee contributions dollar for dollar up to 3 percent of an employee’s contributions or make a fixed contribution of 2 percent of pay for all eligible employees (up to a maximum of $4,600) instead of a match contribution. Employers may choose to permit employees to select an IRA to which their contribution will be sent, or to send contributions for all employees to one financial institution. Employees are 100% vested in all contributions, get to decide how and where the money will be invested, and may keep their IRA accounts even when they change jobs.

Sole Proprietorship A business owned by one person, generally an unincorporated business entity.

Stable Value Fund A fund whose goal is to preserve the investor’s principal while earning interest income. Typical fund investments include guaranteed investment contracts, money market securities, and fixed-income securities. A stable value fund attempts to maintain a constant $1 unit price, but the fund makes no guarantee that the $1 price will be maintained, and the fund’s yield may vary.

Summary Plan Description (SPD) A document summarizing the terms of a retirement plan in plain language. This summary must be distributed to all participants. All plans covered under ERISA must have a summary plan description.

Target Date Fund A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A target fund investor picks a fund with the right target date based on his or her particular investment goal. Also called lifecycle fund.

Vesting The process of earning a right (through being employed for a period of time) not to lose or “forfeit” all or a portion of a retirement benefit. If an employee terminates employment before earning a 100% vested right to a benefit, the employee will lose or “forfeit” the unvested portion of the benefit. Federal law allows employers who want to require vesting to choose between two types of vesting schedules:

  • Graded Vesting, which permits employees to earn a percentage vested right in their benefits each year until they are 100% vested after a maximum of six years
  • Cliff Vesting, which provides that employees have no vested rights until earning a fixed number of years of service (not more than three years) when they become 100% vested.


12B-1 Fees Fees paid by a mutual fund out of fund assets to cover the costs of marketing and selling fund shares. See also distribution fees and shareholder service fees.

401(k) Plan A 401(k) plan allows employees to make pretax employee contributions into an account under the plan. The plan may also include an employer match of all or a portion of an employee’s contributions, as well as a standard profit sharing contribution.

403(b) Plan A 403(b) plan is a retirement plan offered by a 501(c)(3) organization or certain educational institutions, which allows employees to make employee contributions into an account under the plan.

501(c)(3) Organization A 501(c)(3) organization is a not-for-profit organization existing and operating under the guidelines of Section 501(c)(3) of the Internal Revenue Code.