active management: the process of or approach to operating or managing a fund in an active manner, meaning a portfolio manager or team of managers select underlying investments for the portfolio. Unlike passively managed funds, which typically aim to replicate the risk and return profile of an index, actively managed funds typically seek to outperform an index.
actual contribution percentage test, or ACP test: an annual nondiscrimination test of qualified 401(k) plans and certain 403(b) plans that compares the after-tax and employer-matching contributions of eligible highly compensated employees, or HCEs, with those of eligible non-highly compensated employees, or NHCEs, to determine if those contributions discriminate in favor of HCEs. Also known as the 401(m) matching test or the average contribution percentage test.
actual deferral percentage test, or ADP test: an annual nondiscrimination test of qualified 401(k) plans that compares the deferred contributions of eligible highly compensated employees, or HCEs, with those of eligible non-highly compensated employees, or NHCEs, to determine if those contributions discriminate in favor of HCEs.
annual addition limit: the maximum amount that can be allocated to a participant among all defined contribution plans of the employer in a given year. In 2024 the limit is $69,000 or 100% of a participant’s total compensation, whichever is less. Both participant and employer contributions count toward the limit; however, rollovers or transfers into the plan don’t apply.
annual deferral limit: the maximum amount participants can defer from their salary on a pretax basis in a given year. The limit for 401(k), 403(b) and 457 plans is $23,000 in 2024. Participants age 50 and older can make an additional $7,500 in catch-up contributions, for a total of $30,500.
annual rate of return: the annual rate of gain or loss on an investment expressed as a percentage.
asset class: a group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (e.g., stocks), fixed-income (e.g., bonds), and cash equivalents (e.g., money market funds).
Automated Clearing House Network, or ACH: a system used to electronically forward plan contributions to the plan’s trustee. The ACH processes contributions and sends them directly from your company’s checking or savings account through the Federal Reserve Automated Clearinghouse to Capital Bank and Trust Company℠.
automatic enrollment: a way to enroll all eligible employees in a retirement plan and begin participant contributions without requiring them to fill out paperwork to participate. Instead, employees must fill out a form to decline participation in the plan. The plan specifies how much will be deferred and how the automatic contributions will be invested, but participants can make modifications. Also referred to as negative enrollment.
average annual total return: the yearly average percentage increase or decrease in an investment’s value that includes dividends, gains, and changes in share price over the specified period.
blackout period: a period in which participant transactions, such as the transfer or withdrawal of assets, are temporarily limited or unavailable. Blackout periods may be imposed when a plan switches to a new recordkeeper or investment manager. Under ERISA, participants must be given advance notice of blackout periods that will last more than three consecutive business days whenever possible. Also called a transaction freeze.
brokerage window: a plan feature that permits participants to purchase investments that are not included among the plan’s general menu of designated investment alternatives.
capital loss: the loss in the value of an investment, calculated by the difference between the purchase price and the net sale price.
capital preservation: an investment goal or objective to keep the original investment amount (the principal) from decreasing in value.
capitalization (cap): the total market value of a company's outstanding equity. Some investment funds invest in the stocks of companies based on capitalization; for example, a large cap fund will invest in large companies with the largest capitalizations, a small cap fund will invest in the stocks of small companies, and a mid cap fund will invest in companies with caps in between large and small companies.
catch-up provision: Participants age 50 and older can contribute an additional $7,500 in 2024 beyond the general limit to 401(k), 403(b) and 457 plans. SIMPLE participants can contribute an extra $3,500 to their plans in 2024.
cliff vesting: see vesting schedule.
collective investment fund: investments created by a bank or trust company for employee benefit plans, such as 401(k) plans, that pool the assets of retirement plans for investment purposes. They are governed by rules and regulations that apply to banks and trust companies instead of being registered with the SEC. These funds are also referred to as collective or commingled trusts.
company stock fund: a fund that invests primarily in employer securities that may also maintain a cash position for liquidity purposes.
compensation limit: the maximum amount of employee compensation per year that can be taken into account when calculating retirement contributions or benefits for employer-sponsored retirement plans. The limit is $345,000 for 2024.
competing fund: an investment fund that is identified by the investment manager of another fund and which is subject to special rules relating to an investor’s ability to buy and sell investments between the two funds. See equity wash restriction.
corporate bond: a bond issued by a corporation, rather than by a government. The credit risk for a corporate bond is based on the repayment ability of the company that issued the bond.
current yield: the current rate of income return of an investment calculated by dividing its expected income payments by its current market price.
defined contribution plan: a retirement plan in which each participant has his or her own individual account. Benefits are based solely on the amount contributed to the participant’s account plus any income, expenses, gains and losses, and forfeitures that may be allocated to the account.
depreciation: a decrease in the value of an investment.
designated investment alternative: the investment options picked by your plan into which participants can direct the investment of their plan accounts.
determination letter: a letter issued by the IRS indicating that the employer-sponsored retirement plan terms, as written, meet the requirements of the Internal Revenue Code. A plan must have a current determination letter to be eligible to use one of the IRS voluntary correction programs.
distributions: payouts from a retirement or pension plan.
diversification: an investment strategy designed to reduce exposure to risk by spreading assets among a variety of investments, such as U.S. stocks, international stocks, bonds and cash equivalents, which are unlikely to all produce similar results. Holding mutual funds with different objectives can also help investors achieve diversification through the broad range of investments held in fund portfolios.
Economic Growth and Tax Relief Reconciliation Act, also known as EGTRRA: legislation passed in 2001 that reduced tax rates, raised contribution limits for retirement plans and IRAs, and expanded education incentives, among other tax law changes.
emerging market fund: a fund that invests primarily in emerging market countries, which are developing countries that are becoming more engaged with global markets.
Employee Retirement Income Security Act, also known as ERISA: the 1974 federal law governing the operation of most private pension, retirement and benefit plans. The law imposed pension eligibility, vesting and funding rules and established guidelines for the management of pension and welfare funds.
employer securities: securities issued by an employer of employees covered by a retirement plan that may be used as a plan investment option.
equity wash restriction: a provision in certain stable value or fixed-income products under which transfers made from the stable value or fixed income product are required to be directed to an equity fund or other non-competing investment option of the plan for a stated period of time (usually 90 days) before those funds may be invested in any other plan-provided competing fixed-income fund (such as a money market fund).
expense ratio: the cost to invest in an investment fund such as a mutual fund, collective investment fund or other pooled investment vehicle. The expense ratio is typically expressed as a percentage of the fund's assets and paid on an annual basis. Expense ratios for mutual funds vary based on the share class.
fiduciary: under ERISA, any person who 1) exercises discretionary authority or control over the management of a plan or the management or disposition of plan assets; 2) renders investment advice for a fee or other compensation with respect to the funds or property of a plan, or has the authority to do so; or 3) has any discretionary authority or responsibility in the administration of a plan.
fixed-return investment: an investment that provides a specific rate of return to the investor.
forfeitures: the benefits a participant loses when leaving a job before becoming fully vested in his or her retirement plan.
Form 5500: a form used by employee benefit plans to satisfy the annual reporting requirements of the Internal Revenue Code and titles I and IV of ERISA.
401(k) plan: a type of defined contribution plan that allows employees to make pretax contributions to an account. Some plans may allow after-tax contributions as well. Accounts grow tax-deferred until money is withdrawn. In addition to applicable income taxes, early distributions are subject to penalties (though exceptions apply). Employers may also make contributions or offer to match a portion of employee contributions. Also see Roth 401(k).
401(k) safe harbor plan: a plan design that automatically satisfies annual actual deferral percentage testing and, if necessary, actual contribution percentage testing. To qualify as a safe harbor plan, specific requirements must be met with respect to contributions, vesting and employee notification. Plans can also attain safe harbor status by providing an automatic enrollment program that meets certain requirements.
402(f) notice: a document provided to retirement plan participants that describes the tax implications and rollover options when distributions are taken. The IRS requires that participants receive the notice before withdrawing any funds.
403(b) plan: a type of defined contribution plan that allows employees of education, religious or other tax-exempt organizations (known as 501(c)(3) organizations) to make pretax contributions to a retirement account. Some plans may allow after-tax contributions as well. Some 403(b) plans are exempt from nondiscrimination testing. Accounts can grow tax-deferred until money is withdrawn. In addition to regular income taxes, early distributions are subject to penalties (though exceptions apply). Employers may also make contributions or offer to match a portion of employee contributions. Also see Roth 403(b).
404(c): a section of the Employee Retirement Income Security Act that deals with participant self-direction of investments. Plan sponsors (or other named fiduciaries) may reduce their potential liability for investment decisions made by employees in a participant-directed retirement plan if certain conditions are met. The regulations provide guidance to ensure that participants exercise control over the investments in their accounts.
457 plan: a nonqualified tax-deferred retirement plan that accepts pretax contributions from employees of state or local governments or agencies and certain tax-exempt organizations. Plans sponsored by state or local governments or agencies must be funded and plan assets must be held in trust for participants.
fund family: a group or “complex” of mutual funds, each typically with its own investment objective, and usually managed and distributed by the same company. A fund family also could refer to a group of collective investment funds or a group of separate accounts managed and distributed by the same company.
fund of funds: a mutual fund, collective investment fund or other pooled investment that invests primarily in other mutual funds, collective investment funds or pooled investments rather than investing directly in individual securities (such as stocks, bonds or money market securities).
glide path: the change over time in a target date fund’s asset allocation mix to shift from a focus on growth to a focus on income.
global fund: a mutual fund that invests in stocks or bonds throughout the world, including the United States. An international fund, on the other hand, invests only outside the U.S.
government securities: any debt obligation issued by a government or its agencies (e.g., Treasury bills issued by the United States).
graduated vesting: See vesting schedule.
group annuity contract: an annuity contract entered into between an insurance company and an owner for the benefit of a designated group, such as retirement plan participants.
guaranteed interest account: an account within a fixed annuity or a variable annuity that is guaranteed by the insurance company to earn at least a minimum rate of interest while invested in the contract.
highly compensated employee, or HCE: an employee who owns more than 5% of the company or who received more than $155,000 in compensation during the 2024 plan year. This is a key concept in nondiscrimination testing.
inception date: the date that a fund began operations.
Individual Retirement Account, or IRA: a tax-advantaged retirement account in which individuals can invest. Two common types of IRAs are a traditional IRA and Roth IRA. The contribution limit for both traditional and Roth IRAs is $7,000 in 2024 and is indexed annually for inflation. Account owners age 50 and older can make an additional $1,000 catch-up contribution in 2023.
interest rate risk: the possibility that a bond’s or bond fund’s market value will decrease due to rising interest rates. When interest rates (and bond yields) go up, bond prices usually go down and vice versa.
international fund: a mutual fund that invests outside the United States (a global fund, on the other hand, invests in stocks and bonds throughout the world, including the United States). Also called a non-U.S. fund.
investment objective: the goal that an investment fund or investor seeks to achieve (e.g., growth or income).
investment return: the gain or loss on an investment over a certain period, expressed as a percentage. Income and appreciation and depreciation are included in calculating the investment return.
investment risk: the possibility of losing some or all of the amounts invested or not gaining value in an investment.
key employee: a participant who is a company officer earning more than $220,000 in 2024 (adjusted for cost-of-living increases), owns more than 5% of the company, or owns more than 1% of the company and earns more than $150,000 a year.
lump sum: usually refers to a participant's election to receive their entire vested balance in the plan as a one-time payment.
money purchase plan: a type of defined contribution plan in which employer contributions are mandatory and are typically based on a percentage of an employee’s compensation.
nondiscrimination testing: a battery of tests that determine whether a plan unfairly benefits highly compensated employees. Tests include the actual contribution percentage test and the actual deferral percentage test.
non-highly compensated employee, or NHCE: an employee who is not classified as a highly compensated employee.
operating expenses: the expenses associated with running or operating an investment fund. Operating expenses may include custody fees, management fees, and transfer agent fees. See expense ratio and total annual operating expenses.
passive management: the process of or approach to operating or managing a fund in a passive or non-active manner, typically with the goal of replicating the risk and return profile of an index. These funds are often referred to as index funds and differ from investment funds that are actively managed.
payroll data interchange, or PDI: an electronic file from your payroll system that contains census information (e.g., name, date of birth, hire date, Social Security number, compensation, date employee becomes eligible to participate in the plan, etc.) for all employees. A PDI file is downloaded and transmitted via the Plan Service Center to ensure accurate administration and servicing of your plan.
personal identification number, or PIN: an exclusive number that allows participants to access their account information 24 hours a day. PINs are sent to participants once the plan’s transition has been completed.
plan year: the consecutive 12-month period selected by the plan for maintaining its records. The plan year can coincide with the fiscal, policy or calendar year.
profit-sharing plan: a type of defined contribution plan that is funded with discretionary employer contributions and can be tied to company profits.
pre-approved plan: a pre-approved plan is either a “standardized” or “non-standardized” plan. In both cases, the provider of the pre-approved plan submits an application to receive an opinion letter from the IRS, which is a written statement that the plan document is qualified in its form under the Code (i.e., pre-approved). The provisions of a standardized pre-approved plan must be safe harbor (i.e., be designed to meet the non-discrimination testing rules). This generally means the employer will have fewer choices over the design of the plan. The provisions of a non-standardized pre-approved plan do not have to be safe harbor. The employer is permitted to make minor modifications to the plan.
qualified plan: a retirement plan that meets the requirements of section 401(a) of the Internal Revenue Code. Such a plan receives tax advantages. The trust of a qualified plan is tax-exempt under IRC section 501(a).
qualified default investment alternative, or QDIA: an investment that can be used as a default for participant contributions, allowing plan sponsors to avoid fiduciary liability for investment losses when a participant fails to provide investment instructions. Only certain types of investments, determined by the Department of Labor, can be used as a QDIA; these generally include target date funds, balanced funds and managed accounts.
rate of return: the gain or loss on an investment over a period of time. The rate of return is typically reported on an annual basis and expressed as a percentage.
ratio percentage test: a nondiscrimination coverage test that measures the proportion of non-highly compensated employees, or NHCEs, to highly compensated employees, or HCEs, benefiting under a plan. The percentage of NHCEs benefiting under the plan must be at least 70% of the percentage of HCEs benefiting.
rebalance: the process of moving money from one type of investment to another to maintain a desired asset allocation.
redemption fee: a fee sometimes charged by mutual funds to discourage certain trading practices by investors, such as short-term or excessive trading. If a redemption fee is charged it is done when the investment is redeemed or sold.
required minimum distribution, or RMD: the minimum amount that a retirement plan account owner must withdraw annually starting with the year they reach age 73, or, if later, the year in which they retire. However, if the retirement plan account is an IRA or the account holder owns more than 5% of the business sponsoring the retirement plan, the RMDs must begin once the account holder reaches age 73 regardless of whether they are retired. The first RMD may be delayed until April 1 of the following year. RMDs are calculated by dividing the previous year-end account value by the account holder’s life expectancy, as defined by the IRS. Any amount of an RMD that is not withdrawn may be subject to a 25% excise tax.
rollover: the transfer of assets from a retirement plan or IRA that meets certain requirements. Rollovers can be either direct or indirect. Direct rollovers transfer assets from trustee to trustee. The money moves directly from one tax-deferred account to another, so no federal taxes are withheld or penalties are incurred. Indirect rollovers transfer assets to the participant, who, in turn, must transfer the assets into an IRA or employer-sponsored plan within 60 days of receiving the distribution. In the case of a distribution from a plan, the employer who pays out the funds must withhold 20% of the balance for taxes.
Roth 401(k) or 403(b): a salary deferral option that sponsors may offer in their 401(k) or 403(b) plans. Employee contributions are made with after-tax dollars. Qualified withdrawals, including earnings, are tax-free if the account was established at least five years before, and if the participant is at least 59½, is disabled or has died. The earnings portion of nonqualified withdrawals may be subject to income taxes and a 10% early withdrawal penalty. Withdrawals from Roth accounts must begin by age 73; however, Roth assets can be rolled into Roth IRAs, which are not subject to required minimum distributions during the owner's lifetime.
Roth IRA: a retirement account in which individuals make contributions with after-tax money, so contributions are always tax-exempt. Roth IRA contributions may be limited based on income level. Earnings can be withdrawn tax-free if the withdrawal is qualified. Roth IRAs are not subject to required minimum distributions during the account owner's lifetime. See also traditional IRA.
round-trip restriction: a policy that limits the number of times an investor can exchange into and out of a fund within a given time frame. This is intended to discourage frequent trading that increases the costs to all the fund’s investors.
separate account: an insurance company account that is segregated or separate from the insurance company’s general assets. Also refers to a fund managed by an investment adviser for a single plan.
shareholder-type fees: any fee charged for purchasing or selling an investment, other than the total annual operating expenses. See redemption fees.
signature authorization form: designates the individual or individuals who have the authority to act on behalf of the plan administrator.
summary annual report: a summary of a company’s annual report that must be given to each retirement plan participant (or alternate payee or beneficiary) within nine months after the end of the plan year. If the IRS has granted an extension for filing the annual report, however, the summary annual report deadline is extended until two months after the revised IRS deadline.
summary of material modifications: a summary of any material change or modification of a plan or the information contained in the summary plan description that must be furnished to each participant, beneficiary and alternate payee.
summary plan description, or SPD: a written statement of a plan in an easy-to-read format that includes a statement of eligibility, coverage, employee rights and appeal procedures. ERISA requires that employers provide an SPD to participants, beneficiaries and alternate payees.
summary prospectus: a short-form prospectus that mutual funds generally may use with investors if they make the long-form prospectus and additional information available online or on paper upon request.
target date fund: a fund that shifts its investment objective over time as a specific target year approaches. Retirement target date funds are managed based on a projected retirement year, following a glide path that shifts from growth-oriented investments to investments designed for income and capital preservation as investors approach retirement. Although target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met.
target-risk fund: a fund that maintains a predetermined asset mix and generally uses words such as “conservative,” “moderate,” or “aggressive” in its name to indicate the fund’s risk level. Often used interchangeably with “lifestyle fund.”
time horizon: the amount of time that an investor expects to hold an investment before taking money out.
top-heavy plan: a plan in which more than 60% of account balances (both vested and nonvested portions) are held by key employees. If a plan is found to be top-heavy, the employer must generally make up to a 3% contribution to non-key employees who were employed on the last day of the plan year.
total annual operating expenses: a measure of what it costs to operate an investment, expressed as a percentage of its assets, as a dollar amount, or in basis points. These are costs the investor pays through a reduction in the investment’s rate of return. See expense ratio and operating expenses.
traditional IRA: a retirement account for individuals where contributions may be tax-deductible depending on tax-filing status, income level and retirement plan participation. Earnings are tax-deferred until withdrawn. Traditional IRAs are subject to required minimum distributions, which must begin when the account owner reaches age 73. See also Roth IRA.
transaction freeze: See blackout period.
trustee: a person, bank or trust company that has responsibility over financial aspects (receipt, disbursement and investment) of retirement assets.
12b-1 fee: a fee assessed on certain mutual funds or share classes permitted under an SEC rule to help cover the costs associated with marketing the fund. 12b-1 fees may also be used to cover shareholder servicing expenses.
unit: a representation of ownership in an investment that does not issue shares. Most collective investment funds are divided into units instead of shares. See share.
variable annuity: an annuity contract under which the insurance company promises to make payments beginning immediately or at some future date. The value of the annuity and amount of the benefits paid by the insurance company will vary depending on the performance of the investment options.
variable return investment: investments for which the return is not fixed. This term includes stock and bond funds as well as investments that seek to preserve principal but do not guarantee a particular return, e.g., money market funds and stable value funds.
vesting schedule: the timetable for determining the participants’ right to employer contributions accrued in their retirement accounts. Employers who elect to use cliff vesting give participants the right to all company contributions after a specific period of time has lapsed. Employees who leave before this time period forfeit all employer contributions. Employers who select graduated vesting entitle participants to company contributions in specified percentages. Employers who choose to offer immediate vesting give participants instant ownership of company contributions. See forfeitures.
voice response system, or VRS: a toll-free automated phone system employees can use to access their account information, process transfers, and change future allocations.
volume-submitter plan: a pre-approved document similar to a pre-approved plan but with more flexibility in plan design. IRS approval fees for most volume-submitter plans are the same as for pre-approved plans.
wrap fee: a fee or expense that is added to or “wrapped around” an investment to pay for one or more product features or services.
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