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Retirement Glossary

After-Tax Contributions: An amount or percentage of pay an employee elects to contribute from pay, after taxes are calculated and withheld.

Alternate Payee: An alternate payee is a spouse, former spouse, child, or other dependent of a participant, who is recognized by the domestic relations order (DRO) as having a right to receive all or a portion of the benefits payable under the qualified retirement plan with respect to the participant.

Appreciation: The increase in value of an asset.

Asset: A resource having economic value that an individual, corporation, or country owns or controls such as cash, bonds, stocks and/or land with the expectation that it will provide future benefit.

Asset Allocation: The diversification of investments among several asset classes, such as stocks, bonds, and short-term investments (e.g., cash equivalents).  Proper asset allocation may limit risk and increase opportunities.

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

Back-end Load: A sales charge investors pay when they redeem (or sell) mutual fund shares, insurance products, or other investments, generally used to compensate brokers.  Also known as a deferred sales charge.

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

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

Beneficiary: An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity or other contract.

Blackout Period: A period of more than three consecutive business days during which participants will not be able to direct or diversify their investments, obtain a loan or take a distribution.

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

Closed-end Fund: A type of investment company that does not continuously offer new shares for sale but instead sells a fixed number of shares at one time in the initial public offering (IPO).  After a fund’s IPO, its shares typically trade on a secondary market, such as the New York Stock Exchange.  Legally known as a “closed-end company.”

Company Matching Contributions: An amount or percent of pay the company will contribute to the employee’s retirement plan account typically based on the employee’s rate of contribution to the plan.  Generally, although the type and amount of company contributions vary, a company may match $0.50 for every $1.00 the employee contributes, up to a maximum percentage of pay, hence the term company match or company matching contribution.  The type and amount of a company matching contributions vary and are set by the employer.

Common Stock: Securities that represent an ownership interest and give the investor voting rights in the issuing corporation.

Compound Interest: Interest earned not only on the original investment, but on its accrued earnings as well.

Contingent Deferred Sales Load (Charge): A sales charge that investors pay when they redeem (or sell) mutual fund shares.  The amount of the charge depends on the length of time shares were held. After a specified holding period, the charge reaches zero.

Coverdell Education Savings Account: A Coverdell Education Savings Account (or Education IRA) is created exclusively for the purpose of paying qualified education expenses of the designated beneficiary of the trust.   Current Year Testing Method: The “Current Year” testing method uses the non-highly compensated employee (NHCE) Average Deferral Percentage (ADP) in the current year to determine the maximum allowable ADP for highly compensated employees (HCE) during the year.  This method is sometimes favorable if participation is anticipated to increase and does not (potentially) artificially lower the allowed contributions from the HCE group.

Deferred Sales Charge: A sales charge that investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers.  Also known as a back-end load.

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.

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

Equity: The ownership interest of shareholders in a corporation.

Exchange-traded Fund (ETF): A type of investment company whose shares trade on stock exchanges at prices determined by the market.  Compare to mutual fund.

Expense Ratio: On a mutual fund, the operating expenses, including investment management, administrative and other costs, expressed as a percentage of the assets.

Fixed-income Securities: Investments with specified payment dates and amounts, primarily bonds that pay interest.

Front-End Load: A sales charge applied initially to each deposit.  The starting value of the investment is the amount deposited less the sales charge applied.

Global Fund: A fund that invests in stocks throughout the world, including the United States.  See International Fund to understand the difference.

Growth Stock: The stock of a firm whose earnings are generally growing faster than the economy or market norm.  Investment risk with growth stock tends to be high.
Individual Retirement Account (IRA): An individual retirement account, or IRA, is a personal savings plan trusteed by a bank or a qualified nonbank trustee.  It allows you to set aside money for retirement, while offering you tax advantages.   IRAs cannot be owned jointly.  However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.  Types of IRAs include the Traditional IRA, Simple IRA, Education IRA or Coverdell Education Savings Account, and the Roth IRA.

Inflation Rate: A continuing rise in price levels affecting the value of the dollar.  The average inflation rate since 1913 has been 3.24% per year.

Inflation Risk: A continuing rise in the price levels affecting the value of the dollar. The average inflation rate since 1913 has been 3.24% per year.

Interest: The price paid by borrowers for the use of money.  Companies, governments and municipalities (borrowers) pay interest to investors (lenders) who purchase their bonds.

International Fund: A fund that invests in stocks of companies outside the United States.  See Global Fund to understand the difference.

Investment Adviser: Generally, a person or entity that receives compensation for giving individually tailored advice on investing in stocks, bonds, or mutual funds.  Some investment advisers also manage portfolios of securities, including mutual funds.

Investment Management and Administrative Charge: Expenses for managing and administering the assets in the separate accounts offered under the group annuity contract.

Large-cap Fund: A fund that invests in the stocks of “large” companies (as measured by market capitalization or the value of a company’s outstanding stock).

Life Expectancy: The estimated age at which an individual is statistically likely to die.  This value is taken from a standard mortality table based on gender and year of birth.

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

Liquidity: The ability to turn an asset into cash readily.

Management Fee: A fee paid out of fund assets to the fund’s investment adviser or its affiliates for managing the fund’s portfolio, any other management fees payable to the fund’s investment adviser or its affiliates, and any administrative fees payable to the investment adviser that are not included in the “other expenses” category.

Market Index: A measurement of the performance of a specific “basket” of stocks, bonds, or other type of investment considered to represent a particular market or sector of the stock or bond markets, or the economy.

Market Volatility: The relative rate at which investment market prices move up and down.

Maturity: The date by which the issuer of a bond promises to repay the bond’s face value.

Mid-cap Fund: Invests in the stocks of “mid-size” companies (as measured by market capitalization or the market value of a company’s outstanding stock).

Market Risk: The chance that the value of investments will not grow as expected or may even decline in value.

Money Market Instruments: Forms of debt that mature in less than one year.  These investments are easily converted to cash. U.S. Treasury bills make up the bulk of trading in the money markets.

Mutual Fund: A professionally managed pool of stocks, bonds and other securities, which are owned “mutually” by the fund’s 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 basic types of mutual funds.

•    Growth mutual fund: A type of mutual fund that seeks long-term capital appreciation.
•    Income mutual fund: A type of mutual fund that seeks to provide investors with a stable stream of income from dividends or interest.
•    Growth and income fund: A type of mutual fund that seeks a combination of long-term capital appreciation balanced by income from dividends or interest.
•    Money market funds: A type of funds that invests in short-term debt instruments and pays market rate interest while striving to keep your investment dollars liquid.  A money market fund is NOT guaranteed by the FDIC or any other government agency. 

Money market funds have generally provided a dependable level of stability and liquidity; nevertheless, a money market fund is still subject to credit risk and liquidity risk.  Although this investment seeks to preserve the value of principal, it is possible to lose money by investing in a money market fund.  A money market fund may or may not be managed to maintain a stable net asset value of $1.00 per share, and may or may not declare dividends on a daily basis.

Net Asset Value (NAV): The price or market value of an individual share of a security or mutual fund. 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, which generally strive to maintain a NAV of $1.00 per share, the share value will usually change daily.

Operating Expenses: The costs a fund incurs in connection with running the fund, including management fees, distribution (12b-1) fees, and other expenses. Operating expenses are paid from a fund’s assets before earnings are distributed to shareholders.

Portfolio: A collection of investment holdings either in a fund or in one’s personal account.

Preferred Stock: Class of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and/or upon liquidation of company assets.

Pre-Tax Contributions: 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.

Principal: The initial dollar amount invested.  The term “principal” is also used to refer to the amount loaned to a company, government or institution when it sells a bond.

Prior Year Testing Method: The “Prior Year” testing method uses the non-highly compensated employee (NHCE) Average Deferral Percentage (ADP) from the prior Plan Year to determine the maximum highly compensated employee (HCE) ADP for the current plan year.  This method can assist HCEs in setting their deferral percentage so as to not receive excess refunds at plan year-end.   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.

Qualified Domestic Relations Order (QDRO): A Qualified Domestic Relations Order (QDRO) is a judgment decree or order made pursuant to a state domestic relations law that creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan and that complies with certain special requirements.

Qualified Retirement Plan:  Is a retirement plan approved by the IRS that allows for tax-deferred contributions and accumulation of investment income.  Individual Retirement Accounts (IRA) and 401(k) plans are examples of qualified retirement plans.

Qualified Roth 401(k) Account:  Is a separate account under a 401(k) plan to which designated Roth contributions are made, and for which separate accounting of contributions, gains, and losses is maintained.  Qualified Roth

401(k) Contributions:  Voluntary employee contributions that, unlike before-tax elective contributions, are currently included in gross income for current income tax purposes.  If a 401(k) plan is going to provide for designated Roth contributions, it must also offer before-tax elective contributions.  Qualified Roth 401(k) Distributions: The tax rules for distributions from Roth 401(k) accounts differ significantly from those for traditional 401(k) accounts.  If a distribution is a qualified Roth distribution, the entire distribution, including any earnings, is free from federal tax.   Qualified Roth 401(k) distributions must satisfy two rules (both, not either/or): the five-year rule and the purpose rule.  The five-year rule is satisfied if the distribution from the Roth account is made at the end of the 5-year-taxable period following the participant’s first Roth contribution.   For purposes of the five-year rule, the participant’s first Roth contribution is considered contributed on January 1, even if made on December 31, of that same calendar year.  If the participant changes employers, a new 5-year period starts with the date of the first Roth 401(k) contribution to the new employer’s plan.  However, if the Roth account from the previous employer’s plan is rolled over in a direct rollover to the new employer’s plan, the previous 5-year-taxable period is kept.  The purpose rule is satisfied if the distribution from the Roth account is attributable to the participant’s attainment of age 59 ½, disability, or death.  Rate of Return: This represents the return on your investment, including interest, dividends and any other income or growth in the value of your investments.

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

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

Retirement Age: Typically, most pension plans set age 65 as the normal retirement age.  However, for Social Security purposes, your normal retirement age, the age at which you can collect unreduced Social Security retirement benefits ranges from 65 to 67, based on your date of birth.

Return: The profit (or loss) earned (incurred) through investing.

Risk: See “Market Risk” and “Inflation Risk"

Risk Tolerance:  An investor’s ability or willingness to endure declines in the value of investments in exchange for a greater potential investment return.

Roth 401(k): The Roth 401(k) feature permits eligible plan participants, regardless of their income, to make after tax contributions to a qualified Roth account.  In addition, qualified distributions from a Roth 401(k) account are free from federal tax.

Roth IRA: A Roth IRA differs from traditional IRA’s in that contributions are not deductible and can be made only by taxpayers that fall below certain AGI (adjusted gross income) levels.  Unlike a traditional IRA, contributions may be made after age 70½.  Distributions made after the 5-year-taxable period, beginning with the first year a contribution was made to a Roth IRA set up for your benefit, are not taxable if made either:

1.    After you are 59 ½
2.    Because you are disabled
3.    To a beneficiary or your estate after your death
4.    To buy, build or rebuild a first home

Securities: A general term for stocks, bonds and money market instruments.

Separate Account: Pooled investment portfolios established by an insurance company.  They are not registered with the Securities and Exchange Commission if they are available only to retirement plans that are qualified under Section 401 of the U.S. Internal Revenue Code and certain other governmental plans.

SIMPLE-IRA: “SIMPLE” stands for Savings Incentive Match Plans for Employees.  Eligible employees under a SIMPLE-IRA plan may elect to contribute to the plan, similar to a 401(k) plan.

Surrender Charge: A sales charge incurred when an investor withdraws money from an annuity within a certain period after purchase.

S&P 500 Stock: A composite index of 500 large company stocks compiled by Standard & Poor’s Corporation that is used as a broad measure of U.S. stock market performance.

Small-cap Fund: Invests in the stocks of relatively “small” publicly traded companies (as measured by market capitalization or the total market value of a company’s outstanding stock).

Standard of Living: A broad measurement of a person’s way of life, covering factors such as pay, geographic area, home, vehicle ownership and the ability to afford luxuries like vacations.  A goal in financial planning is to maintain the same, if not better, standard of living in retirement as during your working career.

Stock: The capital invested in a company or corporation through the buying of shares, each of which entitles the buyer to a part of the ownership.  When individuals or institutions buy the stocks, they become owners of a piece of the corporation.  This ownership interest is called "equity."

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

Traditional IRA: A traditional IRA is what most people think of when they think of an IRA. The IRS uses the term “traditional” to distinguish it from any other form of IRA.  Any individual with compensation for a calendar year may contribute to a traditional IRA, however you must be under age 70 ½ at the end of the calendar year.  Whether a contribution to a traditional IRA is deductible will depend on the individual’s gross income and whether the individual is an active participant in a qualified plan.  A single traditional IRA can accept both deductible and non-deductible contributions.  Withdrawals taken before age 59 ½ may be subject to a 10% tax penalty.

Transfer: Moving funds from one investment choice to another.

Treasury Bills: Short-term U.S. government debt securities that have maturities of one year or less that is sold at weekly auctions at a discount and is redeemed at face value.

Treasury Bonds: Long-term U.S. government debt securities that have maturities of more than ten years.

Treasury Notes: Intermediate-term U.S. government debt securities that have maturities between one and ten years.

12b-1 Fees: Fees paid by a mutual fund out of fund assets to cover the costs of marketing and selling fund shares.

Unit Value: The value of each unit in an investment account class within a separate account. This value is determined daily by dividing the ending market value of the separate account allocable to that class reduced by the applicable Investment Management Charge and Administrative Charge, by the total number of units in that class prior to any deposits or withdrawals on that day.  The total number of units in that class is then increased for deposits and decreased for withdrawals at the unit value for that day.

Value Fund: A mutual fund whose manager buys primarily undervalued stocks for the fund’s portfolio with the expectation that these stocks will increase in value.

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

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