12(b)1 fee A charge deducted from mutual fund assets to pay for distribution and marketing costs. Charged to the fund, it is listed in the fund’s prospectus.
401(k) plan A type of defined contribution plan originating from Section 401(k) of the Internal Revenue Code. A plan is established by an employer enabling an employee to elect a portion of his or her salary to be deducted from his or her paycheck and contributed to the plan. Employers may also choose to make contributions to a participant’s account. The employee and employer contributions and investment earnings are deferred from federal and state* income taxes (*except Pennsylvania) until the participant receives a distribution from the plan.
ACH The electronic transfer of money between participating financial institutions.
ACP Test The Actual Contribution Percentage test. A non-discrimination test that compares the employer matching contributions of Highly Compensated Employees to Non-Highly Compensated Employees.
Adoption Agreement The document used in prototype plans that specifies plan options. A 401(k) plan can be created by adopting the standard provisions of the prototype with the variable options selected in the adoption agreement.
ADP Test The Actual Deferral Percentage test. A non-discrimination test that compares the 401(k) contributions of Highly Compensated Employees to Non-Highly Compensated Employees.
Annual Audit All ERISA plans with more than 100 participants are required by federal law to be audited by an independent public accountant.
Annual Management Fee Annual management fees are charged by mutual fund companies to run the fund.
Annual Report The IRS requires a document, the Form 5500, to be filed annually. The form reports plan information for the year, including such items as participation, funding, and administration.
Asset allocation The apportionment of one’s securities among classifications: stocks, bonds and money market funds. You decide the allocation based upon your financial objectives and risk tolerance.
Asset class A category of similar investments
Compliance Tests IRS-mandated tests that compare contributions and plan account balances for different classifications of plan participants. The three tests 401k plans must pass each year are the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage) and the Top-heavy Test. By making certain minimum contributions to employees, employers can automatically comply with these tests. Further detail is described within our explanation of each of the above mentioned tests.
Contribution A credit of money received by a plan account. Contributions made by an employer may be either a contribution to all eligible employees or a matching contribution to all participants. Participants elect their contributions through salary deferral.
Deferral Participants contribute to the Plan by selecting amounts to be reduced from their salary before federal and state* income taxes (*except in PA). Income taxes are deferred on contributions and investment earnings until the participant receives a distribution from the plan.
Defined Contribution Plan An employer sponsored retirement plan that is qualified under IRS and DOL regulations to receive a tax-qualified status. The contributions may be made by the employer, the employee, or both, depending on how the plan is designed.
Department of Labor (DOL) The U.S. Department of Labor (DOL) enforces laws related to the American workforce. Pension and Welfare Benefits Administration is the branch responsible for administering the provisions of Title I of ERISA.
Discrimination Testing IRS-mandated tests that compare contribution levels and actual amounts made by different classifications of plan participants. Further detail is described within each of the above mentioned tests.
Diversification The apportionment of one’s securities among different companies or investment categories to minimize risk.
Economic risk The risk created by changes in the economy.
Eligibility Conditions that must be met in order to participate in a plan, such as age or service requirements. ERISA specifies a maximum threshold of 1 year of service and 21 years of age.
Enrollment The process where an eligible employee establishes their initial Plan elections: salary deferral amount, investment allocations and beneficiary designation.
ERISA Employee Retirement Income Security Act of 1974. ERISA established rules that govern how employers create and manage certain types of benefit programs.
Expense Ratio The annual fee charged to mutual fund shareholders as a percentage of total investment for the administration, operation and management expenses associated with the fund. Can include management fees, 12b-1 fees and other fees.
Fidelity Bond Protects participants in the event a fiduciary or other insured person steals plan assets. A Fidelity Bond is required in the amount of 10% of the amount handled by the bonded individual; it may not be less than $1,000 and need not be more than $500,000.
Fiduciary Under ERISA, generally any person who exercises any discretionary authority or control over the management of a plan or the management of disposition of its assets. Fiduciaries act solely in the interest of the participants and the beneficiaries of an employee benefit plan. In addition, a fiduciary must act exclusively for the purpose of providing benefits to participants and beneficiaries and in defraying reasonable expenses of the plan.
Forfeitures Any part of benefits that a participant loses if he or she is not 100% vested upon termination of employment. Forfeitures relate only to employer contributions. Pre-tax and rollover contributions that the employee makes are 100% vested at all times.
Form 1099-R An IRS form for reporting any distribution made to a plan participant, beneficiary, or alternate payee
Form 5500 A joint agency form developed by the IRS, DOL and PBGC that is used to satisfy the annual reporting requirements of the IRC and ERISA
Fund Manager The company manages the investment by buying and selling securities with the goal of having the investment meet the objectives stated in the prospectus.
Hardship Withdrawal An in-service withdrawal from a 401(k) due to an immediate and financial need of participant that cannot be satisfied from other resources and subject to a 10% excise tax.
Highly-Compensated Employee (HCE) For Plan Year 2002, highly compensated employees are defined as persons who own 5% or more of the company or earned more than $90,000 in 2001 and are in the top 20% of the company, ranked by pay. Depending on the plan design and compliance testing, HCEs contributions to the plan may be limited.
Inflation An increase in the prices of products and services over time, representing the decreased purchasing power of a given sum of money.
Inflation risk The risk that the purchasing power of a dollar will fall
Interest rate risk The risks created by changes in market interest rates.
Internal Revenue Code (IRC) Federal tax law
Internal Revenue Service (IRS) This branch of the U.S. Treasury Department is responsible for administering federal tax laws. Qualified pension plans and other retirement plans also fall under their jurisdiction. Plan Administrations must submit the Form 5500 to the IRS annually.
Investment risk The risk that the actual return from an investment will be different from its expected return.
Key Employee Key employees are defined for 2002 as participants who, at any time during the plan year: earned at least $130,000 as indexed and was an officer; or owned 5% or more of the company, or, earned more than $150,000 and owned more than 1% of the company. Key employees are identified for the purposes of Top-heavy testing.
Management Fee Annual fee charged by mutual fund companies to run the fund. Includes such costs as paying the administrative team and the costs of buying and selling investments within the fund.
Market risk The risk created by market conditions that affect all investments of a similar asset class.
Mutual Fund A portfolio of stock, bonds, and/or cash equivalents, which is typically actively managed. Open-ended mutual funds are typically actively managed; the portfolio manager buys and sells securities in an attempt to take advantage of current or expected market conditions. Closed-ended mutual funds hold a fixed portfolio of securities. An investment company that pools together funds from individuals and invests those funds into specific securities designed to meet the specific objective of the funds.
Net Asset Value (NAV) The per share market value of a mutual fund’s assets
Non-Highly Compensated Employees (NHCE) Eligible employees who do not meet the definition of Highly Compensated Employee.
Participant Any employee who is eligible to participate or receive a benefit from an employee benefit plan. Or any former employee with an existing balance within a plan.
Participant Loans A 401(k) plan may allow participant loans. In these plans, the IRS allows employees to borrow one-half of their vested account balance up to $50,000. Loan repayments are made through “after-tax” payroll deductions, with the participant choosing the amortization period (a maximum of 5 years is allowed except for purchase of a home).
Pension and Welfare Benefits Administration (PWBA) The division of the Department of Labor that enforces ERISA regulations for America employee benefit plans.
Plan Administrator The person that operates the Plan according to its terms and the Employee Retirement Income Security Act of 1974 (ERISA).
Plan Assets The segregated and restricted assets including employee and employer contributions and all earnings on contributions.
Plan Document The document that states the provisions of the plan.
Plan Participation Rate The percentage ratio of eligible employees who are enrolled in the plan over all eligible employees.
Plan Sponsor The organization that establishes and maintains the plan.
Plan Year The year so defined by the plan.
Pre-Tax Contribution Participant elected payroll deferrals are included in Social Security Taxes (FICA) and excluded from federal and state income taxes (except the PA state income taxes).
Prospectus A document for investors that describes a particular mutual fund and its overall investment goals.
Prototype Plan A qualified retirement plan that has been approved and qualified as to its concept by the IRS.
QDRO Qualified Domestic Relations Order. A court order under a state’s domestic relations law that recognizes an alternate person to pay (such as a child or former spouse) right to receive some (or possibly all) of a participant’s retirement plan benefits if the Plan Administrator approves the order as a QDRO.
Qualified Plan A plan that can meet the requirements of Section 401(a) of the Internal Revenue Code and as such receives the federal income tax treatment provided by IRC Section 401, 402 and 501.
Rate of return A measure of the amount an investment earns usually expressed as an annual percentage.
Risk tolerance The willingness to accept investment risk.
Rollover A transfer (rollover) from one qualified tax-deferred plan or IRA into another using a method where the money is not subject to early withdrawal penalties or income taxation.
Self-Directed Account Although any investment option in a plan that provides participant-directed investment is “self-directed”, employee benefits practitioners use the term to mean: An investment option that allows plan participants to invest in stocks, bonds, and mutual funds outside of the core investment line-up. A self-directed account will include additional setup, trading and transfer fees.
Service Provider A company that provides a service to the plan administrator, such as recordkeeping, or participant investment education.
Summary Plan Description (SPD) A document required by ERISA that describes the features of an employer-sponsored plan. The main purpose of the SPD is to disclose the primary features of the plan to participants and potential plan participants. ERISA requires that certain information in layman’s terms be contained in the SPD, including participant rights under ERISA, claims procedures and funding arrangements.
Top Heavy Plan A plan in which more than 60% of account balances (both vested and non-vested) are held by key employees. A Top Heavy Plan must remedy the situation with additional contributions from the employer, changing to an accelerated vesting schedule.
Top Heavy Test An IRS mandated test that limits percentage of assets in the plan held by key employees to 60%.
Total return The sum of current income and capital gains from an investment.
Valuation A determination of the value of an investment or investment portfolio. Mutual funds are valued every business day.
Vesting The mathematical schedule selected on the adoption agreement by the plan sponsor for allocating the ownership of the employer contributions deposited in eligible employee’s accounts. Vesting schedules are based on years of service with an employer. Employees are always 100% vested in their own contributions.