Glossary Of Terms & Concepts

A General Resource For Retirement Plan & Investment Related Terminology.

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401(k) Plan

A retirement savings plan that allows employees of for-profit corporations and non-profit organizations to reserve money for retirement on a pre-tax basis through a plan sponsored by their employer. The Federal government has created special tax advantages for contributions made into 401(k) plans, including, but not limited to, allowing contributions deducted directly from employee pay before taxes are calculated and allowing the earnings on funds in the employee's 401(k) account to grow tax-deferred until withdrawn at retirement.

403(b) Plan

A tax-deferred retirement plan offered by nonprofit organizations, public schools, and municipal agencies. Generally, 403(b) plans follow 401(k) rules for contributions, rollovers, and withdrawals. Employees contribute to the plan via payroll deduction. Income taxes are deferred on the contributions and any plan earnings until the employee withdraws the funds. Withdrawals may begin without penalty at age 59 ?, however become mandatory after age 70 ?. Investment choices in 403(b) plans are typically more limited than 401(k) plans.

457(b) Plan

The 457(b) plan is a non-qualified deferred compensation plan for states, counties, cities, agencies, and their political subdivisions or agencies. Deferred compensation is a contractual agreement between an organization and an employee wherein the organization makes an unsecured promise to defer the compensation of the employee to some future date for services currently performed by the employee. Annual contributions are made through salary deduction up to $12,000 or 33 1/3% of salary, whichever is less. Distributions are made upon retirement, termination of employment, extreme financial hardship or at death to the named beneficiaries.

12(b) 1. Fees

Fees collected by mutual funds for the sale and promotion or other activity connected with the distribution of their shares. Typically 12(b)1 fees are between ?% to 1% of net assets managed, up to a maximum of 8.5% of the offering price per share.

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A

Account Balance

Amount of money held in a qualified retirement plan on behalf of an employee participating in the plan.

ADP/ACP Test

In accordance with IRS regulations, the IRS requires that a 401(k) plan must pass Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) Tests each year. Generally, the Actual Contribution Percentage (ACP) Test is the same as the Actual Deferral Percentage (ADP) Test, except employer matching and after-tax employee contributions are tested instead of deferral contributions. -- Based on three different, yet specific circumstances, the ADP of the Highly Compensated Employees generally may not exceed either 2%, or 2 times or 125% of the Average ADP of the non-Highly Compensated Employee.

After-Tax Contributions

Although many plans do not offer this option, this is an amount or percentage of pay an employee elects to contribute from pay, after taxes are calculated and withheld. Also known as "voluntary" contributions.

Age Weighted Plans

Age weighted plans are profit sharing plans in which plan contributions are allocated in proportion to some multiple of compensation and age or years of service. The result is that a lesser amount is contributed to young employees and larger contributions are made to older employees with higher salaries (presumably including the owner).

Aggressive Growth Funds

A type of mutual fund that focuses more on increasing the value of the original investment than on the price stability or income. Many aggressive growth funds invest in smaller, less established companies that have the potential for long-term growth, but that are potentially more susceptible to changing market conditions, than larger more stable companies. Aggressive Growth Funds involve more investment risk than more conservative investments.

Annual Additions Limitation

The limitation of the amount of contributions to a retirement plan participant's account to the lesser of $40,000 (in 2002) or 100% of the plan participant's compensation, as indexed. Includes all employee contributions, both pre-tax and after-tax, employer contributions and any forfeitures reallocated to a plan participant's account during the applicable limitation year [annual additions.

Annual Compensation

The amount defined in a retirement plan that usually includes salary, commissions, bonuses, and overtime paid to the plan participant during the plan year. For the self employed, annual compensation means earned income as defined by the plan in the plan's Basic Plan Document.

Annuity

A contract that guarantees fixed or variable payments over time. Some investors buy annuities to provide them with a stream of income in the future.

Assets

The property and resources, such as cash, investments or property, of a person or corporation, or retirement plan.

Asset Allocation Funds

The model asset allocation fund uses three asset classes: stocks, bonds and cash. As markets fluctuate, asset allocation funds have the ability to shift weightings among these classes. In addition, some funds include other asset classes, such as real estate concerns and natural resource companies. In recent years, for diversification purposes, foreign holdings have been introduced into the mix of some funds.

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B

Balanced Funds

Balanced funds strive to keep the proportions of stocks and bonds in their portfolios stable, or at least predictable, in different market climates. Because of the general appeal of these funds as core holdings, many balance funds also restrict themselves to conventional sorts of investment instruments. Most of the stock holdings resemble the S&P 500 index, while the bond holdings often track broad indexes of investment-grade bonds.

Bond

The most common debt security. A bond is basically an "IOU" certifying that the bondholder has loaned money (principal) to a corporation or government and describing the terms of the loan, repayment period and interest rate. A bond typically matures in 10 to 30 years (maturity date) and pays interest only at regular intervals. The principal amount of the bond is repaid at maturity. Municipal bonds are bonds issued by a state or local (city) government or agency.

Bond Fund [General]

A Bond Fund is a mutual fund that invests predominantly in investment-grade domestic corporate debt [bonds]. The majority of Bond Funds also have small holdings in U.S. Treasuries and many may have sizable weightings in mortgage-backed securities. Many corporate-general funds have at least mild weightings in high yield bonds. Many also have small stakes in foreign bonds.

Bond Fund [High Yield]

A High Yield Bond Fund is a mutual fund that specializes in the debt of financially troubled companies [bonds]. These issues feature less certain pay-outs than the bonds of higher-quality firms, so they offer higher yields. The further below investment-grade, the more a bond trades on the merits of the underlying company. Exposure to privately placed debt (i.e., it is not publicly traded) is common for these funds. The high-yield group is one of the more aggressive bond categories.

Board Of Director's Resolution

Signed by the Board of Directors, a document that contains the authorization to take an action regarding a retirement plan. Typically used in adopting a plan, or declaring a profit sharing contribution.

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C

Capital Appreciation

The increasing value of a stock or other investment. In a mutual fund for example, as the value of the underlying securities in the fund increases, the fund's share price increases, and the value of the investment appreciates.

Capital Gains & Capital Losses

When shares are sold at a higher price than what was paid for them, a profit, or capital gain is experienced. When shares are sold at a lower price than what was paid for them, a loss, or capital loss is experienced. Taxes are treated differently in a retirement account. In a retirement account capital gains are treated as ordinary income when distributed.

Common Stock

An ownership share in a corporation.

Contribution Period

The period for which matching employer contributions and non-elective employer contributions are calculated.

Company Match

An employer contribution made to a qualified retirement plan that is given to participants who make an employee contribution. Generally, although the type and amount of company contributions vary, a company may match $0.50 for every $1.00 the employee contributions.

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D

Defined Benefit Plan

Retirement plans that guarantee a specific retirement benefit.

Defined Contribution Plans

Retirement plans that may require specific rates of contribution, but that do not guarantee a specific retirement benefit.

Determination Letter

A document issued by the IRS regarding the qualified status of a retirement plan. If a retirement plan is qualified, monies invested in the plan remain tax-deferred until they are distributed. A determination letter may be issued on the plan's initial qualification when the plan is first established, or when the plan is amended or terminated.

Distribution

Payment from a qualified or non-qualified plan made to a participant or participant's beneficiary.

Diversification

Directing money into a number of investments that have different levels of risk and return to spread overall risk potential.

Dividend

In a mutual fund, a distribution of investment income earned by the fund.

Diversified Emerging Markets Stock Fund

Diversified Emerging Market Stock Funds invest in the stocks of companies located in developing countries. A diversified emerging markets fund is generally one that spreads its investments all over the world, and does not concentrate its investments in any one region. Developing countries with active stock markets are found in Asia, Latin America, Europe, the Middle East and Africa.

Dollar Cost Averaging

A system of investing a regular amount of money, usually in stocks or mutual funds, at fixed intervals, regardless of the price of the investment at the time. The goal of dollar cost averaging is to buy more shares at lower, as opposed to higher, prices, although there is no guarantee that this, and not the opposite, will occur.

Domestic Hybrid

Domestic hybrid is Morningstar's category for balanced funds and asset allocation funds that invest primarily in the United States.

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E

Effective Date

The date that a retirement plan becomes legally active.

Eligible Employees

Employees who have met the criteria for participation in the 401(k) plan. Eligibility criteria can include attainment age 21, tenure and/or hours worked during a specific year.

Entry Date

The date on which an employee [plan participant] enters his/her employer's retirement plan.

Equity Income (Value) Funds

Typically a conservative stock fund that seeks to achieve reasonable income by investing primarily in income-producing stocks and bonds. Generally, the primary objective of an equity income fund is dividend income and growth of income with capital appreciation as a secondary objective. Sensitive to the domestic economic cycle, equity income funds have traditionally performed well during periods of steady economic expansion and not so well during periods when economic growth is stagnant.

Equity

Equity is ownership interest. The purchase of the common stock of a company, represents some percentage of ownership, or equity, in that company.

ERISA

The Employee Retirement Income Security Act of 1974, as amended.

Expense Ratio

The percentage of the fund's average net assets that is paid out in expenses. Such expenses include 12b-1 fees, management and administration fees and all the fees associated with the fund's daily operations, except brokerage costs. Federal law requires that the investment returns of mutual funds be reported net of these expenses.

Europe Stock Funds

Europe stock funds seek long-term capital appreciation by investing primarily in stocks, convertible bonds, warrants traded on European stock exchanges, and American Depository Receipts of European companies. The members of this group tend to prefer exposure to the large, developed economies of Western Europe, such as the United Kingdom, Germany and France, rather than the emerging markets of Eastern Europe or smaller peripheral countries. The fluctuation of European currency values can have a considerable effect on total returns.

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F

Fixed Income Funds

A type of mutual fund that seeks to achieve consistent income with reduced risk over time by investing in corporate and municipal bonds and U.S. government obligations, such as Treasuries.

Fiduciary

Generally, a fiduciary is a person who exercises discretionary control over the assets of another party and has a responsibility to that party. ERISA sets forth strict standards which govern the responsibilities of a fiduciary and the determination of who is a fiduciary.

Forfeitures

Sometimes there is money that is left in a retirement plan when an employee terminates his or her employment before being fully vested [a forfeiture]. Such forfeitures may be used by the plan to defray plan expenses or reallocated among the remaining participants in the retirement plan, depending on the plan provisions.

Foreign Stock Funds

Foreign stock funds invest in stocks of companies in developed countries located outside of the United States.

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G

Global Funds

Global funds are mutual funds that invest in stocks of companies all over the world, including the United States.

Government Bond Funds

Government bond (general) funds hold most of their assets in Treasury Bonds and/or agencies of the U.S. government. Government bond (treasury) funds hold most of their assets in debt issued by the U.S. Treasury.

Growth Funds

Growth Funds are mutual funds that invest primarily in stocks that have shown or are expected to show quick earnings and revenue growth. They typically do not declare very sizeable dividend payments and may be more risky investments than most other stocks.

Growth & Income Funds

Growth & Income Funds generally split the difference between growth funds and equity income funds. This type of mutual fund invests for both long-term capital appreciation from stocks as well as regular dividend income from stocks and bonds. Depending on their specific objectives, some of these funds are weighted more heavily toward growth, others toward income.

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H

Hardship Withdrawal

If allowed by the plan, participants may request a withdrawal from their retirement plan account, their elective deferral contributions and/or their employer's match contributions, to address a "hardship". For a withdrawal to qualify as a "hardship", it must satisfy a two-part test: #1- the withdrawal must be requested due to the participant's immediate and heavy financial need; and #2- the withdrawal must be necessary to satisfy such need.

Reasons for hardship withdrawals can include: (i) - coverage of uninsured medical expenses for the participant, a spouse or eligible dependents; (ii) - purchase of a primary residence; (iii) - payment of post-secondary tuition costs for the participant, a spouse or eligible dependents; (iv) - payments necessary to avoid foreclosure or eviction from the participant's principal residence.

The plan sponsor is responsible for determining whether a certain situation constitutes an emergency.

Highly Compensated Employee

Employees who during the "determination" (current) year or the "look-back" (preceding) plan year, owned more than 5 percent of their company; and/or during the "look-back" year, earned more than $85,000 (as indexed).

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I

Income Fund

A mutual fund that invests in securities that produce dividend income.

Inflation Risk

The chance that the value of investments won't keep up with inflation. If the rate of return is lower than inflation, prices will rise faster than the value of the savings.

Index Fund

A mutual fund that invests in stocks or bonds that make up a widely used market index, such as the S&P 500 Index. The goal of an index fund is to mirror market performance.

Individual Retirement Account (IRA)

A tax-deferred plan that permits individuals with earned income (and their spouses), to put aside contributions for retirement. For normal IRA's, there is no tax on the earnings until they are distributed, and the contributions are deductible within certain limits.

International Funds

A mutual fund that invests primarily in securities issued by non U.S. companies.

IRS Form 5500

A form used to report information concerning employee benefit plans, including 401(k) retirement plans, to the Internal Revenue Service, Department Of Labor and the Social Security Administration. This form must be completed and filed annually.

J

K

Key/Non-Key Employees

As defined by the IRS, employees who meet certain compensation, ownership and authority criteria. This determination of key and non-key employees is necessary when performing top-heavy tests.

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L

Lifestyle Funds

Lifestyle funds were designed for investors who do not wish to actively manage their portfolios. They are funds that seek a specific overall investment goal by adjusting their assets among stocks, bonds and money market instruments or by investing in different kinds of mutual funds. These funds might include asset allocation funds, which regularly shift money between asset classes to achieve consistent performance in varying market conditions.

Lump Sum Distribution

A single distribution that represents the total amount due to an individual from their retirement plan.

Load

A sales charge added to the price of a mutual fund share. Mutual funds that don't have sales charges are called no-load funds.

Large Company Growth Funds

Large company growth funds generally invest in large companies that have higher than average earnings, growth rates, price/earning ratios, and price/book ratios.

Large Company Value Funds

Large company value funds generally invest in large companies that have lower than average earnings, growth rates, price/earning ratios, and price/book ratios.

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M

Matching Contribution

See "Company Match"

Money Market Fund

Money Market funds seek to maintain principal and generate the highest interest income consistent with that objective. They invest primarily in money market instruments [mature in less than a year], also called cash, such as commercial paper, CDs, T-Bills, and Bankers' Acceptances.

Money Purchase Plans

A money purchase plan is a defined contribution plan in which the employer commits to contribute a fixed percentage of payroll on behalf of eligible employees each year. Common percentages are between 10% and 15%. Because contributions to a money purchase plan are so regular, an employee can make a rough projection of a retirement benefit. This is more difficult to do with other types of defined contribution plans because the amounts of contributions in other plans are more variable. The contribution obligation in a money purchase plan is inflexible. Because of this, money purchase plans are generally considered to be "rich" plans and inappropriate for a business that lacks stable profits. Other types of plans are better suited to allow a business to make large contributions in good years and small contributions in bad years.

Mutual Fund

The most common type of investment used in retirement plans. A professionally managed pool of stocks, bonds and other securities, which are owned "mutually" by the funds investors in proportion to their investment in the fund. The amount of risk varies among the different investments in the fund. In this way, your investment is diversified. There are four primary and basic types of mutual funds: growth, income, growth & income, and money market.

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N

NASDAQ

National Association of Securities Dealers Automated Quotations system. Computerized system that provides price quotations for securities traded "over the counter" and for many New York Stock Exchange listed securities.

Net Asset Value (NAV)

The price or market value at which an individual share of a security or mutual fund could be sold. In the case of a mutual fund, the net asset value is calculated daily and is determined by adding up the value of all the securities and cash in a fund's portfolio, subtracting liabilities, if there are any, and dividing that number by the number of shares the fund has issued. Except for money market funds, the share value will usually change daily.

No-Load

A mutual fund that does not charge a sales fee for mutual fund transactions, such as buying and selling shares, is called a "no-load" fund.

Non-Discrimination Testing

A series of tests designed to ensure that participation in a plan represents employees at all levels of income within an organization. The purpose of these tests is to prevent a disproportionate amount of contributions from being given to Highly Compensated Employees.

Normal Retirement Age (NRA)

The age at which a plan participant can take a retirement distribution from their retirement plan. The NRA can vary from plan to plan, but is normally age 65.

O

P

Participant

An employee who has met the eligibility and entry requirements and is therefore covered under the retirement plan sponsored by his or her employer.

Plan Document

The written document setting forth the terms of the employee sponsored qualified retirement plan.

Plan Sponsor

An employer who establishes and maintains a qualified retirement plan.

Pre-Tax Contribution

An amount or percentage of pay an employee elects to direct from pay, before taxes are calculated and withheld, and contribute to his or her retirement plan account.

Profit Sharing Plan

A profit-sharing plan is a defined contribution plan whereby the employer contribution made into the plan is a discretionary decision made by the employer each year. This may be accomplished as follows: (1) The plan may indicate that contributions will be a percentage of the net profits of the business. (2) The plan may allow the employer to declare a contribution every year. (3) The plan may set performance goals for the business, providing for a contribution only if the goal is met. Once the contribution is determined it is divided among all the employee accounts, usually in proportion to compensation. Profit-sharing plans are attractive because first, the business is not obligated to make contributions, second, employees have an incentive to improve their performance because good performance of the business may translate into a contribution to their retirement.

Prospectus

A thorough, written description of a security, including mutual funds, as well as the legal selling document. It describes the fund's history and investment objective. It also provides information on the background of the fund managers, a financial statement and an explanation of fees required in the sale or management of the fund or security.

Profit Sharing Contribution

An annual discretionary contribution made by the employer after an employee satisfies the plan's eligibility requirements. The profit sharing amount is determined at plan year-end. Profit sharing contributions will be allocated generally in the ratio that a participant's eligible compensation bears to the total compensation paid to all eligible participants for the plan year.

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Q

Qualified Match (QMAC)

Matching contributions that are 100% vested at all times and are subject to the same restrictions on distributions as salary deferral contributions. These contributions are considered qualified because they can be used to help pass the ADP/ACP tests.

Qualified Retirement Plan

A retirement plan that may (1) permit contributions by both employees and/or the employer and allows some kind of tax benefits (such as deferring payment of taxes on some contributions and earnings); (2) restrict distribution of the money so it is used in retirement, except under certain circumstances. Both defined benefit plans (such as a pension plan) and defined contribution plans (such as a 401(k) plan) may be qualified retirement plans.

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R

Real Estate Fund

A mutual fund that primarily invests in securities related to real estate, such as Real Estate Investment Trusts ("REITS") and the stocks of companies in the real estate business.

Rollover

Moving money from one tax-qualified plan to another qualified or individual retirement account in order to prevent immediate tax liability.

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S

Safe Harbor (401k) Plan

A variation of the conventional 401(k) Plan that allows plan sponsors to fundamentally "buy" their way out of the Actual Deferred Percentage (ADP) and Actual Contribution Percentage (ACP) tests describes the Safe Harbor 401(k) Plan. In certain cases, a "Safe Harbor" contribution also satisfies the minimum contribution requirement for plans that are or might be expected to become "top-heavy"(True for all in 2002).

Salary Deferral

Contributions deducted from an employee's compensation on a pre-tax basis and invested in a qualified retirement plan.

Sales Charge

A fee charged on the purchase of new shares of a mutual fund. A sales charge is similar to paying a premium for a security in that the customer must pay a higher offering price. It is sometimes called a load.

Small Company Growth Funds

Small company growth funds generally invest in relatively unknown small companies that have higher than average earnings, growth rates, price/earning ratios, and price/book ratios.

Small Company Value Funds

Small company value funds generally invest in relatively unknown small companies that have lower than average earnings, growth rates, price/earning ratios, and price/book ratios.

Stable Value Fund

The Stable Value Mutual Fund is the "Bank CD" of mutual funds. Instead of a CD from a bank, however, money is invested primarily in Guaranteed Investment Contracts (GICs) from insurance companies. This concept results in the most conservative option available to retirement plans. Stable Value Funds are not available outside of qualified retirement plans.

Stock Plans

An employer may adopt a retirement plan that holds stock of the employer. One main purpose of a stock plan is to allow employees to share in the potential growth in company stock. This gives employees an incentive to exert their best efforts, similar to a profit-sharing plan. But unlike a profit-sharing plan, a stock plan gives employees a stake in the performance of the business even after the contribution is made.

Summary Plan Description

An overview of the rules and benefits of the retirement plan established by the company. The plan administrator is required by the Department of Labor to provide a copy of the summary plan description to each employee covered under the plan.

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T

Tax-Deferred

Term describing an investment whose accumulated earnings are not subject to taxation until the investor takes possession of them.

Top Heavy Plan

A plan in which the key employees own more than 60 percent of the assets in the plan. A top-heavy plan is required to provide minimum contributions equal to the highest contribution percentage of any key employee up to a maximum of 3% of compensation to all non-key employees. A top-heavy plan has a minimal vesting schedule.

U

V

Vesting

Depending on the provisions of the plan, employees, after having been with an employer for a specified period of time, are "vested" in that fund or plan.

Vested Account Balance

Amount of funds held in a qualified retirement plan that a participant can receive as a distribution when he or she terminates employment with the employer who sponsors the plan. A participant is always fully vested in his or her salary deferrals and the earnings on those contributions. The vesting for employer contributions and earnings on employer contributions is based on the years of service a participant works for the employer.

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W

Withdrawal

Payment from a qualified retirement plan or participant. Withdrawals (and other distributions) are taxed as ordinary income and may also be subject to a 10 percent early withdrawal penalty if taken before age 59 1/2. Federal income tax will be withheld at a rate of 20 percent unless eligible rollover distributions are directly rolled over to another employer's qualified plan or an IRA.

X

Y

Yield

The annual dividend or interest payment an investor expects to receive, divided by the price of the stock or bond.

Z

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