Retirement programs are complex in nature. Typically, descriptions about retirement plans include a lot of technical jargon that only adds to your confusion. This page is designed to provide you with a way to decode much of the retirement-related terminology.

To search for a specific word or phrase, you can simply scroll through the page or click on the letter below. You may also use your browser’s find function. (Internet Explorer users can type CTRL+F.)

12(b)1 Fees

A plan that permits a fund to pay some or all of the costs of distributing its shares to the public. Some of these plans provide for payment of specific expenses, such as advertising, sales literature and dealer incentives. Others are simply intended to protect the fund against possible claims that certain operating expenses, such as administrative or advisory costs, constitute indirect forms of distribution expenses. Both load and no-load funds may adopt 12(b)1 plans. They are not hidden charges, but are clearly explained in the fund's prospectus and in its semi-annual and annual reports. Many funds have 12(b)1 plans that have not been activated. The majority of such plans have maximum annual charges of 0.25% (one quarter of 1%). 12(b)1 charges are included in the total expense ratio figures which are provided in a fund's literature. Some fund's expense ratios, including management fee and 12(b)1 charges, may be lower than the ratios of funds that do not have 12(b)1 plans.

401(k) Plan

A tax-deferred retirement plan that can be offered by businesses of any kind. Employers often match a percentage of an employee's contributions or make discretionary contributions. Employees control how the assets are allocated, according to parameters defined by the employer.

403(b) Plan

Section 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares. Typically, an employee may contribute to the plan in a manner similar to 401(k) plans. Employers may also make contributions on an employee’s behalf.

404(c)

Section 404(c) of ERISA law provides a plan sponsor and other fiduciaries with liability protections on participant-directed retirement plans, like a 401(k) plan, but only if the satisfies the conditions stated in the 404(c) regulations. These conditions require plan sponsors provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.

Accrual Basis

An accounting method where income and expenses are reported when they are incurred. This is in contrast to cash-basis accounting, which reports income and expenses when they are actually received or paid. For example, you may receive an employer contribution for the plan year which is not “funded” (or deposited) until later the following year. Using accrual basis accounting, your contribution will be reported on your statement during the year it was “earned”—even if your employer hasn’t deposited it yet.

Accumulation Period

In the retirement industry, this is the years during which one is making regular contributions to a retirement plan or deferred annuity. The period is considered to end when the income payments begin, or upon retirement.

Actual Contribution Percentage (ACP)

In a 401(k) plan, this is the result of the average of ratios of combined contributions to compensation for both highly compensated and non-highly compensated employees. Each employee’s ratio is calculated and then averaged for the group. The ACP test is required for qualified plans to maintain such status with the Department of Labor and the Internal Revenue Service.

Actual Deferral Percentage (ADP)

This is the proportion of a plan participant’s compensation that is contributed to a 401(k) plan as an employee elective deferral. The ADP test is required for qualified plans to maintain such status with the Department of Labor and the Internal Revenue Service.

Advisory Fee

Fees charged by brokers or investment advisors for investment transactions or advice.

Aggressive Growth Fund

A mutual fund that seeks long-term capital growth by investing primarily in stocks of fast growing smaller companies or narrow market segments, such as "the technology sector" or "the Internet sector." sometimes called a capital appreciation fund.

Amortization

The systematic repayment (e.g., monthly, quarterly, or yearly) of a debt or loan, such as a bond or mortgage, over a specific time period.

Annuity

A contract by which an insurance company agrees to make regular payments to an individual or designated beneficiary for life or for a fixed period. Some investors buy annuities to provide them with a stream of income in the future.

Appreciation

Increase in the value of an investment over time.

Asset Allocation

Dividing your investment portfolio among the major asset categories or among the funds available under a retirement program. Also called your investment elections.

Asset Allocation Fund

A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. This gives individual investors far more diversification than is possible when allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Asset

A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

Audit

The examination of an entity's accounting documents and financial statements by a professional accounting firm to verify their accuracy and conformity with generally accepted accounting principles. Qualified retirement programs with more than 100 eligible employees might be required to have a plan audit.

Auditor’s Report

The declaration of a professional accountant following the review of a retirement plan’s financial statements and practices. The report describes the scope and the findings of the review and is an important assurance to a lender or investor. The opinion of an auditor can be unqualified or qualified, depending on the extent of the audit performed and the auditor’s confidence in the accuracy of the financial statements.

Automatic Enrollment

The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested. Typically, an employer must provide some notice that the plan utilizes automatic enrollment.

Automatic Reinvestment

A method in which the dividends or other earnings from an investment are used to buy additional shares in the same investment vehicle.

Balanced Fund

A common trust fund or mutual fund that maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.

Blackout Period

When a plan sponsor decides to switch from one service provider to another, there is typically a period during which participants are not permitted to make changes in their investment selections or transfer existing balances. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days and notice must be provided to participants 30 days before the blackout period commences.

Bond

A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Bundled Plan

A 401(k) plan that utilizes one company to provide all investment, administration, education, and recordkeeping duties. This is in contrast to an unbundled 401(k) plan in which the plan sponsor can individually hire each component provider separately.

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. The plan provides the benefits in the form of a lump-sum distribution or annuity.

Cash or Deferred Arrangement (CODA)

See Salary Reduction Plan.

Capital Gain

An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year).

Catch-up Provision

A provision found in some 401(k) plans that allows eligible employees who are at least 50 years old to make higher annual contributions in the years prior to retirement. This amount varies depending on the year.

Certificate of Deposit (CD)

A bank instrument that enables a depositor to earn interest on his or her money during a fixed a period of time. The rate varies depending on the amount invested and the duration of the CD.

Civil Service Retirement System

A pension plan for federal workers hired before 1984. Most workers hired since then go into the Federal Employees' Retirement System (FERS).

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.

Collective Trust Fund

Works and act much like a mutual fund. Collective trust funds (also called common trust funds) offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But collective funds do not impose the same administrative fees and do not have some of the regulatory requirements, generally resulting in lower operating expenses.

Commission

Broker's fee for buying or selling securities.

Compliance Testing

All qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, including multiple numerical measurements each year. This ensures that the plan is fair to both highly compensated and ordinary employees. These tests include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test. Also called discrimination testing.

Compounding

The ability of an asset to generate earnings that are then reinvested and generate their own earnings. Over time, compound earnings can increase savings dramatically.

Custodian

The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities, but has no role in portfolio management.

Deemed IRA

The "Deemed IRA" (also called a "Sidecar IRA") was part of The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA), although the concept has been around since the early 1980’s. Basically, if your 401(k) plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401(k) plan may allow employees to make voluntary employee contributions to a "Deemed IRA" which is a separate account established under the plan.

Defined Benefit Plan

A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Employees typically do not contribute to these accounts. Defined benefit plans are guaranteed by Pension Benefit Guaranty Corporation (PBGC).

Defined Contribution Plan

A defined contribution plan does not promise a specific benefit at retirement, but may provide regular, set contributions to a retirement account. Defined contribution plans tend to be less expensive for employers to operate than defined benefit plans, but also provide employees more control in determining their total retirement savings.

Depreciation

Decrease in the value of an investment over time.

Direct Rollover

A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a "trustee to trustee" transfer. The transfer is made without any funds being sent directly to the plan participant. When participants choose to make direct rollovers, the account balance is not subject to current taxation or penalties.

Discrimination Testing

All qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, including multiple numerical measurements each year. This ensures that the plan is fair to both highly compensated and ordinary employees. These tests include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test. Also called compliance testing.

Distributions and Withdrawals

When money is withdrawn from a retirement program, the withdrawal is referred to as a distribution. Typically, plan assets can be withdrawn without penalty after age 59½. But this age may vary; check your plan document. Employees are required to begin taking distributions after age 70½.

Diversification

The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Dividend

Payments by a company to its stockholders (or those who hold stock included in a specific mutual fund). A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation's directors decide to retain earnings to invest in business operations.

Dividend Payout Ratio

Annual dividends per share divided by annual earnings per share.

Dividend Yield

Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.

Dollar-Cost Averaging

A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.

Dow Jones Industrial Average (DJIA)

Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

Employer Matching Contribution

The amount, if any, that the employer contributes to the employee's 401(k) account. Matching contributions are usually configured to provide a set percentage of an employee's contribution, up to a fixed limit (either dollar or percentage).

Employer Discretionary Contributions

Some employers make contributions at plan-year end in the form of an increased matching contributions and/or a profit sharing contribution. The employer may determine the amount to contribute (or not contribute) each year. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis.

Equities

Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.

ERISA

Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package pertaining to all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of Pension Benefit Guaranty Corporation.

Estate Planning

Planning for the orderly handling, disposition and administration of assets that are left behind after an individual's death. Includes drawing up a will, setting up trusts and figuring out ways to minimize estate taxes.

Excess Returns

Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

Expected Return

The average of a probability distribution of possible returns.

Expense Ratio

The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses. Higher expense ratios typically mean lower fund performance than a similar fund with lower expense ratios.

Fiduciary

An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. In the retirement industry, this is typically the relationship that exists between the plan sponsor and other parties (those who are responsible for providing appropriate investment information and choices) and the plan participant. A plan fiduciary has a responsibility to educate the plan participant and provide appropriate investment vehicles. See section 404(c) for more information.

Fiscal Year

An accounting period consisting of 12 consecutive months.

Fixed-Income Securities

Investments that represent an I-O-U from the government or a corporation to the investor, offering specific payments at predetermined times. Examples of fixed-income securities are public and private bonds, government securities, and a 401(k)'s guaranteed accounts. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

Guaranteed Investment (Interest) Contract (GIC)

A debt instrument sold in large denominations by insurance companies, often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk. The company issuing the GIC makes the guarantee, not the U.S. Government.

Highly Compensated Employee

A Highly Compensated Employees (HCE) is an employee who received more than $90,000 ($85,000 in 2001) in compensation during the last plan year OR who is a 5% owner in the company. These individuals must be tested separately from non-highly compensated employees in a retirement plan’s compliance testing.

Income Dividend

Payment of interest and dividends earned on a fund's portfolio of securities after operating expenses are deducted.

Income Fund

A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index Fund

A mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard & Poor's 500-stock 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, who meet certain income limitations.

Individual Retirement Account (IRA)

A personal retirement account set up by an employed person with a contribution of up to $2,000 a year (or $4,000 for a couple). Contributions may be tax-deductible, and earnings are not taxed until the funds are withdrawn at age 59½ or later. Individuals who receive lump-sum payments from pension or profit-sharing plans can rollover, or invest that sum, into an IRA. Rollover distributions typically avoid all taxation. See also Simple IRA and Roth IRA.

Inflation Indexed

Benefits that rise over time to offset increases in the cost of living, usually as measured by the Labor Department's consumer price index.

In-Service Withdrawal

A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and also by plan documents. In-service withdrawals of employee deferrals are prohibited by law prior to age 59½. While allowed by law after that age, most plans do not allow it. In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59½, but most plans prohibit it.

Insider Trading

Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.

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 I-O-U.

Investment Adviser

A person who manages assets, making portfolio selections, and provides investment advice. These services are usually provided for a fee, typically a percentage of the assets invested.

Keogh Plan

A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares.

Lagging Indicator

Economic indicator that changes directions after business conditions have turned around.

Lifestyle Fund

A mutual fund that maintains an asset allocation based on the expected retirement age of the investor; generally, the investor's portfolio will be shifted into less-risky assets as one grows older, or closer to retirement.

Limit Order

An order placed with a broker to buy or sell at a price as good or better than the specified limit price.

Market Sentiment

The feeling, sentiment, or tone of a market. This is usually shown by the activity or price movement of the securities represented within the market. For example, a bullish market sentiment would be indicated by rising prices and strong demand for securities, while a bearish sentiment would be indicated by falling prices and a lack of demand for securities.

Market Timing

Attempting to leave the market entirely during downturns and reinvesting when it heads back up.

Maturity

The length of time until the principal amount of a bond must be repaid.

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 funds make these high interest securities available to the average investor seeking immediate income and high investment safety.

Money Purchase Pension Plan

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.

NASDAQ

National Association of Securities Dealers Automated Quotations System. This is a computerized system that provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.

Net Asset Value (NAV)

The current market worth of a mutual fund share. Calculated daily by taking the funds total assets securities, cash and any accrued earnings deducting liabilities, and 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-Highly Compensated Employee (NHCE)

This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.

Non-Qualified Deferred Compensation Plan

A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer’s creditors.

Non-Qualified Plan

A pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.

Participant Contributions

The dollars that employees contribute to their 401k plans.

Participant Directed Account

A plan that allows participants to select their own investment options. See Participant Directed Investing.

Participant Directed Investing

In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.

PBGC

Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

Pension Fund

A fund set up and invested by an employer or a labor union to provide retirement income for workers. The funds accumulate income and capital gains tax-free which are used to pay benefits.

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 Vendor

Companies that administer, service and/or sell 401k plans. They are generally employed by the plan sponsor.

Plan Year

The calendar or fiscal year for which plan records are maintained.

Portability

This occurs when, upon termination of employment, an employee transfers pension funds from one employer's plan to another without penalty.

Portfolio

The group of individual securities held by a person or an institution.

Power of Attorney

Authorization of one person to make legal decisions and take other actions, such as signing legal documents, on behalf of another person.

Present value

The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

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 pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.

Prohibited Transaction

Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. This includes transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction.

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. You should always read the prospectus on any mutual fund before investing.

Prudent Investor Rule

The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) certain actions can be delegated to other agents and fiduciaries. ERISA [ § 404(a)(1)(C) ] generally follows the approach of the Prudent Investor Rule.

Prudent Man Rule

A rule originally stated in 1830 by the Supreme Judicial Court of Massachusetts that, in investing, all that can be required of a trustee is that he conduct himself faithfully and exercise a sound discretion and observe how a person of prudence, discretion, and intelligence manage their own affairs not in regard to speculation, but in regard to the permanent disposition of their funds considering the probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as a part of state fiduciary law, usually with certain different specifics from state to state.

Put Option

The right to sell stock at a specified (exercise) price within a specified period of time.

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.

Real Rate of Return

The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

Refinancing

Revising a payment schedule, usually to reduce monthly payments. A common way to do this is to reduce the interest rate on a mortgage.

Return on Equity (ROE)

A ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how effect their money is being employed.

Return

Consists of income plus capital gains (or losses) relative to investment.

Risk/Return Trade-Off

The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

Risk

Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

Risk Tolerance

The extent to which an investor will accept risk in the pursuit of a financial reward. The greater an investor's tolerance, the more risk s/he will accept in order to reach their goal.

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 cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.

Roth IRA

New in 1998, these IRAs are funded with nondeductible contributions and are not taxed upon withdrawal. Only singles with adjusted gross income of less than $95,000 may make a full contribution (partial contributions may be made up to income of $110,000). Likewise, only couples with income less than $150,000 may make a full contribution, with partial contributions allowed up to $160,000. Withdrawals can be made only under limited circumstances.

Salary Reduction Plan (Cash or Deferred Arrangement)

A CODA is a defined contribution plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. These plan types include 401(k), 403(b) and 457 plans.

Savings or Thrift Plan

A defined contribution plan in which participants make contributions on a discretionary basis (with limits) and to which employers may also contribute, usually on the basis of fully or partially matching participants' contributions. Contributions are commonly made with after-tax earnings.

Sidecar IRA

See also Deemed IRA.

SIMPLE IRA

Savings Investment Match Plan for Employees, for companies with up to 100 employees. Allows workers to put aside up to $6,000 per year; their employers can choose to match contributions dollar for dollar up to 3 percent of the worker's pay or make an across-the-board contribution of 2 percent to each eligible worker. Employers opting for the 3 percent match can cut it to 1 percent for two out of any five years.

Simplified Employee Pension Plan (SEP)

A pension plan in which both the employee and the employer contribute to an Individual Retirement Account.

Socially Responsible Investing

An investments strategy that only purchases securities of individual companies that espouse some form of social responsibility, e.g., "green" funds that target investments reflecting environmental awareness.

SPD

See also Summary Plan Description.

Stock Dividend

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

Stock Split

The division of a company's existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held and the price would be split in half.

Stockbroker

An agent who, for a commission, handles the public's orders to buy and sell securities.

Summary Plan Description

Employee benefit plans monitored by ERISA require a Summary Plan Description (SPD) be distributed to each plan participant and to each beneficiary receiving benefits under the plan. The SPD outlines, in general terms, the basic rules and provisions of the plan. For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.

Target Benefit

A target benefit plan is a defined contribution plan that acts much more like a defined benefit plan. Contributions are set for each year, but are variable based on the age of the employee. This allows older employees to receive similarly sized pensions as younger employees despite having less time for investments to grow.

Tax Deferred

An investment which accumulates earnings that are not subject to taxes until the investor takes possession of the earnings, often at a point at which the investor is in a lower tax bracket than before, such as retirement.

Tax Free Rollover

Provision whereby an individual receiving a lump sum distribution from a qualified pension or profit sharing plan can preserve the tax deferred status of these funds by a "rollover" into an IRA or another qualified plan if rolled over within sixty days of receipt.

Thrift Savings Plan

A savings and investment plan for federal workers.

Transaction Costs

Costs incurred when buying or selling securities. These include brokers' commissions and dealers' spreads (the difference between the price the dealer paid for a security and for which he can sell it).

Treasury Bill

Short-term debt security issued by the federal government for periods of one year or less.

Treasury Bond

Long-term debt security issued by the federal government for a period of seven years or longer.

Treasury Note

Long-term debt security issued by the federal government for a period of one to seven years.

Trust

A fiduciary relationship in which one person (the trustee) is the holder of the legal title to property (the trust property) subject to an equitable obligation (an obligation enforceable in a court of equity) to keep or use the property for the benefit of another person (the beneficiary).

Unfunded Vested Pension Liability

In a defined benefit pension plan, the difference between the actuarially-determined value of the vested benefits under the plan, and the market value of the plan's assets.

Unfunded Prior Service Pension Liability

In a defined benefit pension plan, the difference between the actuarially-determined value of the projected future benefit costs (both vested and manifested) and administrative expenses, as well as the unamortized portion of prior benefit costs, under the plan, and the market value of the plan's assets.

Valuation

The process of determining the current worth of an asset.

Vesting

The period of time an employee must work for an employer before gaining access to employer-contributed monies. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.

Wrap Account

A special type of brokerage arrangement where the investors place their funds and pays an annual fee for investment management services. All costs are "wrapped" into this one fee including all administrative fees, commission costs, management fees, etc.

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.