Glossary

A resource for referencing 401(k) terms and concepts.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A

Account Balance - Amount of funds held in a qualified retirement plan on behalf of an employee eligible for the plan.

American Depository Receipt - American Depository Receipt (ADR) is a receipt for the shares of a foreign-based corporation held in the value of a U.S. bank and entitling the shareholder to all dividends and capital gains.

Amortization - The reduction of a debt through periodic payments.

Annuity - A contract in which an insurer agrees to make regular payments to an individual for a fixed period of time or for life.

Asset Allocation - The process of dividing your money between different types of investments (also known as asset classes)-such as stocks, bonds, cash equivalents and real estate. The goal is to select a mix of different investment types (known as your asset allocation) that will generate a particular return at a level of risk with which you are comfortable. The general idea is that if you own a number of assets that behave differently from each other, you should always have some investments that are doing well, which will hopefully compensate for other investments that might be doing poorly at a particular point in time. Asset allocation is considered by investment professionals to be the major determining factor in long-term performance of investment portfolios.

Asset Allocation Funds - The prototype asset allocation fund uses three asset classes: stocks, bonds and cash. As markets fluctuate, most asset allocation funds 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.

Asset Allocation Model - Your plan may have several asset allocation models from which to choose, any of which will provide you with a well-rounded and diversified portfolio. Within a model, various fund options available within your plan are combined to provide a series of 'pre-built' portfolios that you may choose for your investments. Each model has a different investment focus: generally conservative, moderate, moderate aggressive or aggressive.

Asset Class - A way of differentiating between different types of investments. The primary asset classes are stocks, bonds and cash investments.

Average Maturity - Average maturity is the average length of time it takes a portfolio's bonds to mature, i.e., when the issuer of the bond repays the investors' principal. Generally, the longer the weighted average maturity of a fund's portfolio, the greater the price volatility.

B

Balanced Funds - Of funds in the hybrid category, balanced funds provide the most straightforward combination of exposure to both stocks and bonds. Balanced funds earn their designation in most cases by striving 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 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.

Basis Point - A basis of measurement. One basis point equals one hundredth of one percent. One percentage point equals 100 basis points. In other words, a mutual fund with an annual expense ratio of 96 basis points costs .96% per year (or .0096).

Bear Market - Although prices generally fluctuate from day to day, a bear market is one that loses value for an extended period of time, typically a year or more.

Beneficiary - A person or persons designated to receive the proceeds of a retirement account or other financial asset in the event of the primary owner's death. A contingent beneficiary is a person or persons designated to receive the proceeds of a retirement account or other financial asset in the event of the primary owner's death, as well as the death of the primary beneficiary.

Blue-Chip Stocks - Shares in the country’s largest companies.

Bond - An IOU issued by a government or corporation. The issuing body is borrowing money from investors with the agreement that the amount borrowed plus interest will be repaid in a given time period.

Bull Market - Although prices generally fluctuate from day to day, a bull market is one that gains value for an extended period, often several years.

Business Risk - The risk that a single company may not perform well. To avoid business risk, an investor should invest in a variety of companies instead of investing everything in just one company.

C

Capital Appreciation - The increasing value of a stock or other investment. For example, if you invested in a stock or stock mutual fund selling for $10 per share and it now sells for $15 per share, that $5 increase is called capital appreciation.

Capital Gains and Losses - If you purchase a stock for $10 per share and sell it for $15 per share, you have a capital gain (profit) of $5. However, if you bought the stock for $10 per share and sell it for $5, then you have a $5 capital loss.

Catch-Up Contribution - A 401(k) plan may permit participants who have reached age 50 by the end of a calendar year to make "catch-up" contributions for that year in excess of the standard 401(k) plan limits. Catch-up contributions recognize the fact that individuals over age 50 may be more likely to increase retirement savings as they near retirement age. Increased contributions can effectively help them "catch up" for earlier years of low savings. The table below outlines the standard 401(k) plan contribution limit (called the 402(g) limit), as well as the applicable catch-up contribution limit for several plan years.
After 2006, the amount of catch-up contributions will be adjusted periodically in increments of $500 to reflect cost-of-living increases.

Common Stock - An ownership share in a corporation.

Company Match - An employer contribution made to a qualified retirement plan that is given to participants who make an employee contribution. An employer may choose to "match" your contribution and contribute to the plan on your behalf. For example, for every $1 you contribute, your employer may add 50¢, up to the first 6% of pay that you contribute. Under this scenario, if you earn $25,000 a year and contribute 6% of your pay to the 401(k) plan ($1,500 annually), your employer would add $750 to your account.

Compounding - Compounding occurs when you earn income not only on your original investment, but also on the earnings your investment has already generated. For example, if you earned 10% this year on your original $1,000 investment, your account would now be worth $1,100. Next year, you will earn 10% on the $1,100 you have now accumulated. Over time, compounding can have a significant effect on your overall return.

Corporate Bond - All companies need to raise money in order to finance their operations and projects. Some raise money by issuing stock; others do so by issuing corporate bonds. If you purchase a corporate bond, you are loaning your money to the corporation for a given amount of time, and at a given rate of interest. The company agrees to pay you your principal investment plus interest over a given time period.

(General) Bond Fund—The corporate bond general fund is one of the most diverse of all the taxable bond groups. Most funds in this objective invest predominantly in investment-grade domestic corporate debt. The majority also has 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.

(High Yield) Bond Fund—High-yield bond funds specialize in the debt of financially troubled companies. These issues feature less certain payouts 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.

D

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 plan made to a participant or participant's beneficiary.

Diversification - The strategy of spreading one's money among many different investments and types of investments in an effort to reduce risk.

Diversified Emerging Markets - Diversified emerging market funds invest in the world's developing nations. While such countries span the globe, most of these offerings currently focus more on the markets of the Pacific Rim and Latin America and less on those of the Middle East, Africa, or Mediterranean and Eastern Europe.

Dollar Cost Averaging - An investment strategy in which a person invests a fixed amount of money at regular intervals. Using this method, an investor buys more shares when the price is low and fewer shares when the price is high.

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

E

Equity - Equity is ownership interest. For example, when you purchase the common stock of a company, you have ownership in that company.

Equity Income Funds - Equity income funds are typically conservative stock funds. Generally, the primary objective of an equity income fund is dividend income and growth of income with capital appreciation as a secondary objective. These funds search for well-established companies in high-yielding sectors, such as utilities, energy and industrial manufacturing. 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.

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

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.

Expense Ratio - The percentage of a mutual fund's net assets that is used to pay its expenses. The expense ratio of a fund tells you how much you are paying a portfolio manager to pick stocks for you. Obviously, you want this ratio to be low, without sacrificing the sometimes-higher costs of a good manager. Other expenses included in this ratio include the administrative and distribution costs of managing a mutual fund (including all "12b-1 fees"). Keep in mind that the stated total return for an investment is "net" of expenses. That is, expenses have already been deducted when the total return is reported.

F

Fixed Interest Funds - Fixed interest funds pay a fixed rate of interest over a specified term. Often they are funded through a guaranteed investment contract that is sold and backed by an insurance company.

Fiduciary - Generally, a fiduciary is a person who exercises discretionary control over the assets of another party and has a responsibility to that party. Fiduciaries of qualified retirement plans are sometimes called ERISA fiduciaries. ERISA sets forth strict standards which govern the responsibilities of a fiduciary and the determination of who is a fiduciary.

Foreign - Foreign stock funds may invest in companies located around the world, excluding the United States and usually emerging markets. Typically, they are diversified and do not invest solely in one region.

G

Global Fund - A mutual fund that invests in the stocks and bonds of countries all over the world, including the United States.

Government Bond (General) Funds - Government bond (general) funds hold mostly Treasuries and agency mortgage-backed securities. The main variable in these funds' performance is their interest-rate sensitivity. Long-term funds almost always outperform shorter offerings when interest rates fall, and trail them when rates rise. The performance of these funds is often affected by the size and nature of their positions in mortgage-backed securities. Mortgage-backed securities offer a higher yield than Treasuries of comparable duration; however, they generally underperform comparable Treasuries in extended markets where interest rates are changing.

Government Bond (Treasury) Funds - The Treasury group is composed of funds that hold most of their assets in debt issued by the U.S. Treasury. Some of these funds do hold a small portion of their assets in mortgage-backed securities or even corporate bonds, but most prefer to keep 100% in Treasuries. As a result, credit risk and prepayment risk are usually not a concern here. Interest-rate risk is the main variable. Funds with longer maturities typically outperform those with shorter maturities when interest rates fall, and lose more when rates rise.

Growth Funds - Growth funds offer many different means to the same end: growth of capital. Not only are there large- and small-cap offerings, there are also funds that favor high-multiple stocks and those that exist at below market prices. While many growth funds are very well diversified and rather market-like in their sector weightings, others emphasize only one or a handful of sectors ranging from technology to financials. Growth funds tend to be more volatile than both growth and income and equity income funds; they also tend to be less risky than their aggressive growth counterparts. There are, however, a few high-risk growth funds.

Growth and Income Funds - Growth and income funds generally split the difference between growth funds and equity income offerings. They aim for steady, if not high, income payouts, while placing equal weight on capital appreciation. Among all equity funds, these funds look most like the S&P 500; the majority has large-cap portfolios with market-like sector weightings. Thus, while they are not necessarily the least risky equity offerings, these funds can be less susceptible to short-term economic cycle and sector shifts. Growth and income funds generally make suitable core holdings in diversified equity fund portfolios.

Guaranteed Investment Contract (GIC) - A contract between an insurance company and your retirement plan which promises to pay a fixed interest rate over a specified period of time. Note: A GIC is guaranteed only by the issuer; it is not insured by the FDIC.

H

Hedging - Sometimes referred to in profiles as an investment strategy used by a fund manager to reduce risk—especially in stock funds that invest in foreign equities that are constantly exposed to currency devaluation risk.

High Yield - See Corporate Bond (High Yield) Funds.

I

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 IRAs, there is no tax on the earnings until they are distributed, and the contributions are deductible within certain limits.

Inflation Risk - Over time, savings and investments are eroded because of inflation. A dollar today does not buy as much as it did five years ago. In another 10 years, it may buy even less. Investors must search for investments whose return outpaces inflation.

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

International Hybrid Funds - International hybrid funds seek total return and diversification by typically investing in three asset classes: equities, fixed-income and cash. These funds may also invest a significant portion of their assets in foreign securities, which distinguish them from other asset allocation funds. Many international hybrid funds do not contain rigid class allocations, and are permitted to dedicate almost all of their resources to a specific asset class, if desired. Some funds actively shift weightings among these classes; others do not try to time the markets, but instead seek diversification through investments in various countries or industries.

Investment-Grade Bonds - An investment-grade bond has a credit rating in the top four tiers, and is rated by two or more of the major credit rating agencies.

J

Junk Bond - Bond with a credit rating that is not in the top four tiers of a credit rating agency, or that is not rated by such an agency.

K

There are no glossary terms for this letter.

L

Lump Sum Distribution - A single distribution which represents the total amount due to an individual from their retirement plan.

Large Company Growth Funds - Large company growth funds invest in large blue-chip companies, currently enjoying high revenue and profit growth. Coca-Cola, Intel, Nike, Microsoft, Merck, Johnson & Johnson, Gillette, GE, etc., these are examples of companies that comprise this segment of the U.S. market. Due to their widely popular success, however, their stock price often trades at relatively high multiples (high P/E, high Price/Book) which means the stock is more expensive and volatile than large company value stocks.

Large Company Value Funds - Large company value funds invest in a relatively tame segment of the U.S. stock market. These funds generally buy large, well-known, blue-chip companies, but only when their stock price is cheap. This valuation is measured by such ratios as: low price/book ratio, low price/earnings ratio, or low price/cash flow ratio. Consequently, these funds will often provide the highest dividend yield. In other words, these funds buy well-known companies experiencing temporary weakness.

M

Market Timing - An investment strategy based on anticipating market trends and buying and/or selling investments accordingly.

Matching Contribution - An employer contribution made to a qualified retirement plan that is given to participants who make an employee contribution. An employer may choose to "match" your contribution and contribute to the plan on your behalf. For example, for every $1 you contribute, your employer may add 50¢, up to the first 6% of pay that you contribute. Under this scenario, if you earn $25,000 a year and contribute 6% of your pay to the 401(k) plan ($1,500 annually), your employer would add $750 to your account.

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

Multi-Asset Global - Multi-asset global funds seek total return and diversification by typically investing in three asset classes: equities, fixed-income, and cash. These funds may also invest a significant portion of their assets in foreign securities, distinguishing them from their asset allocation siblings. Many multi-asset global funds do not contain rigid class allocations and are permitted to dedicate almost all of their resources to a specific asset class, if desired. Some funds actively shift weightings among these classes; others do not try to time the markets, but instead seek diversification through investments in various countries or industries.

Multi-Sector Bond - Multi-sector bond funds seek income at moderate volatility by primarily allocating their assets among three types of bonds. Such funds customarily invest in U.S. government bonds including Treasuries and mortgages, both sovereign- and corporate-foreign debt, and domestic high-yield bonds. Allocations among the three markets vary with most funds keeping a benchmark allocation of one third of the assets. Some funds seek further diversification and yield by adding municipal bonds, exotic mortgage-backed securities, and a significant percentage of emerging markets to their portfolios.

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. NASDAQ quotes are published in the financial sections of most newspapers.

Net Asset Value (NAV) - The price at which a fund's shares could be sold. The NAV of a fund is equal to the difference between the total market value of the mutual fund's securities and other assets less the total liabilities, divided by the number of shares outstanding. You will always purchase mutual fund shares at NAV within your retirement plan through The 401(k) Company.

Net Change - The difference between the last trading price on a stock, bond, commodity, or mutual fund from one day to the next.

No-load Fund - A mutual fund that does not impose a sales charge on the purchase of shares.

Normal Retirement Age (NRA) - The age at which you can take a retirement distribution from your retirement plan. NRA can vary from plan to plan.

O

There are no glossary terms for this letter.

P

Pacific Stock - Pacific stock funds can be divided into three subsets based on their geographic orientation. Pure Japan funds are limited to Japan and are the smallest subset. Southeast Asia funds focus on that region, excluding Japan from their purview. Many also invest in Korea, Taiwan, India and the other peripheral Asian exchanges, and a handful invest in New Zealand and Australia as well. Region wide offerings spread their assets across the Pacific Basin, but usually devote the largest share of their assets to Japan. Whatever their geographic range, these funds share the potential for substantial gains and for jarring volatility.

Participant - An employee who has met the eligibility requirements and is therefore covered under the qualified retirement plan sponsored by his or her employer. Once an employee becomes a participant in a 401(k) plan, he or she may elect to make salary deferrals.

Plan Document - The written document setting forth the terms of the employer-sponsored qualified retirement plan.

Plan Sponsor - An employer who establishes and maintains a qualified retirement plan.

Pre-Tax Contributions - Voluntary employee payroll deductions that are deposited into a qualified retirement plan and are not currently subject to income taxes (i.e., tax-deferred). These contributions are also referred to as "401(k) contributions" and "salary deferrals".

Profit Sharing Contribution - A profit sharing contribution can be made to certain qualified plans. The amount of such contributions is discretionary, but often is based on company performance.

Promissory Note - The document describing the amount and terms of a loan agreement wherein the borrower legally agrees to repay a loan in accordance with the terms of the note.

Q

QDRO- A qualified domestic relations order (QDRO) is a court order that assigns all or a portion of the benefits which would otherwise be payable to a participant under a qualified retirement plan to another person. If the court order does not meet all of the requirements for a QDRO, a plan is prohibited from paying plan benefits to anyone other than the plan participant.

R

Real Estate Fund - Most funds with this objective invest primarily in real estate investment trusts (REITs), professionally managed firms that specialize in the development and management of real estate properties. Types of REITs include apartment, factory-outlet, health-care, hotel, industrial, manufactured housing, mortgage, office, regional mall, self-storage, shopping center, triple-net lease REITs, or a combination of these. Some funds in the group diversify into banks, construction companies, and other real estate-related firms. Most real estate funds confine themselves to investing in the United States, but some are globally diversified.

Rebalance (automatic) - The act of returning the investment of your entire account balance to the percentages you elected for your portfolio via your most recent fund election for future contributions. If you elected an asset allocation model for your future contributions, rebalancing of your entire account balance is done automatically on a periodic basis. If you elected to build your own model (in other words, if you created your own individually designed portfolio), automatic rebalancing is completed only if you elected the automatic rebalance feature.

Rebalance (elective; also known as an exchange) - The act of buying and/or selling funds from your account according to the percentages you selected in your most recent fund election. An exchange rebalance (or current balance transfer) is a one-time investment change to your current account balance that is initiated by you.

Rebalancing - The process of adjusting a portfolio's holdings to reestablish the desired asset allocation. For example, if the desired investment mix is 60% stocks and 40% bonds but, due to market performance, the current allocation is 55% stocks and 45% bonds, the act of rebalancing would sell the gains that had been made in bonds to bring them back to 40% of the portfolio. The proceeds from the sale of the bonds would be used to purchase more stocks, bringing them back in line with the 60% target percentage. Rebalancing is considered an effective way to increase the potential long-term return of a portfolio, while minimizing risk.

Repurchase Agreement - An agreement that allows securities (acquired by a fund from a securities dealer or bank) to be resold at an agreed upon price at a later date.

Return - Profit or loss on an investment, usually expressed as an annual percentage rate if calculated over one (1) or more years.

Right - The privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of stock before it is offered to the public.

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

S

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

Sharpe Ratio - A risk-adjusted measure that relates the fund's performance to the amount of risk taken by the fund's manager. The higher the ratio, the more efficient the fund is in delivering returns when risk is taken into consideration.

Small Company Growth Fund - Small company growth funds invest in the most aggressive and volatile segment of the U.S. market. Often, the funds which invest in this segment of the market are "momentum" traders. Characterized by higher than average portfolio turnover, these funds often try to time the market by jumping in and out of the high-flying stocks at just the right time. These stocks may be appropriate for thrill-seeking investors who are willing gamble.

Small Company Value Funds - The opposite of small company growth is small company value. Over the past ten years, this segment has outperformed all others in the U.S. stock market, while carrying average volatility, relatively speaking. These small/value companies are companies relatively unknown, but instead of selling at high price multiples, these stocks sell at "auction" prices. The reason these stocks are selling so cheap...everyone dislikes them. Years and years of lagging or negative growth, a stock price that has fallen for five years in a row, and a product line that is consistently beaten by its competitors...these are all the characteristics of a good value stock. Why? Because you are buying after the damage has already been done, when it seems that it can get no worse, when everyone else has fled from the stock...that is when you can find a bargain.

Stable Value Fund - A stable value fund is like a CD from your bank. In fact, most stable value funds are like a mutual fund of CDs. Instead of a CD from your bank, however, money is invested primarily in GICs from insurance companies. A GIC is a Guaranteed Investment Contract. The resulting blend is often the most conservative option available to 401(k) plans. Stable value funds are not available outside of qualified retirement plans.

Stock - A share of stock represents a portion of ownership in the company that issued the stock. Companies issue stock in order to raise capital.

T

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

U

There are no glossary terms for this letter.

V

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.

W

Warrant - A warrant is a type of security—usually issued with a bond or stock—that allows the holder to buy a given amount of stock at a specified price—usually higher than the market price at the time of issue.

Withdrawal - Payment from a qualified retirement plan to a participant who is usually still employed by the employer who sponsors the plan.

World Stock Fund - World stock funds typically have few geographical limitations, and most currently divide assets among developed, emerging, and U.S. markets. The recent popularity of foreign markets, however, has made this objective less homogenous, and the funds now offer a wider range of median market capitalizations and industry concentrations. Thus far, this group has historically shown lower volatility than other international stock objectives. This may change however, as some of the funds are no longer simply internationally diversified core holdings; they are more involved in peripheral markets, and thus subject to greater economic, political, and currency risks. On the other hand, some world funds are so heavily invested in the U.S., it is hard to differentiate them from domestic stock funds that have a small position in foreign stocks.

X

There are no glossary terms for this letter.

Y

There are no glossary terms for this letter.

Z

There are no glossary terms for this letter.