401(k) Plan- a type of retirement plan in which employees may elect to make a pre-tax contribution to an employer-sponsored plan in lieu of receiving taxable income. Employers may also make contributions to a participant’s account. Taxes on investment income are deferred until time of withdrawal on an after-tax basis.
403(b) Plan- a plan for employees of certain not-for-profit organizations to elect to defer compensation in a qualified retirement plan.
Accrued Benefit- a benefit earned by an employee through participation in a plan. In a defined contribution plan, it is the balance in the individual account at a particular time.
Active Participants- eligible individuals who have hours of service and continue to participate in a retirement plan.
Actual Deferral Percentage (ADP)- a nondiscrimination test applied to elective contributions to determine if those contributions discriminate in favor of highly compensated employees.
Administrator/ Plan Administrator- person or entity charged with the responsibility of administering the terms (provisions) of the retirement plan document.
Age-weighted- plan in which contributions are allocated to participants on a basis that considers both age and compensation.
Alternate Payee- a person other than a plan participant (such as a spouse, former spouse, child, etc.) who, under a domestic relations order, has a right to receive all or some of a participant’s pension benefits.
Amendment- changes made to selected provisions of an existing plan.
Annual Report- a document filed annually (Form 5500) with the IRS that reports pension plan information for a particular year, including such items as participation, funding and administration.
Annuity- a contract issued by an insurance company providing retirement income at regular intervals.
Automatic Deferral Default Percentage- the percentage of pay that is deferred when an employee is enrolled in a plan through its automatic enrollment feature.
Automatic Enrollment- the practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate.
Average Contribution Percentage (ACP)- a nondiscrimination test applied to employer matching and employee (after-tax) contributions, to determine if those contributions discriminate in favor of highly compensated employees.
Beneficiary- the person(s) or trust to whom a share of a deceased participant’s account balance is payable.
Blackout- a temporary period of time during which the participants are not allowed to make changes to their 401(k) accounts or to receive distributions or loans. This generally occurs during a conversion to a new recordkeeper, or when significant changes are being made to the plan.
Break in Service- the applicable computation period during which an employee has not completed more than 500 hours of service with the employer. Generally, no service credits or vesting accumulations occur during this period.
Cash or Deferred Arrangement (CODA)- a qualified retirement plan feature that allows participants to have a portion of their compensation (otherwise payable in cash) contributed, pre-tax, to a retirement account on their behalf. (see 401(k) plan)
Cash-Out- a distribution from a plan that is paid without the Participant’s consent. For a cash-out to occur, the Participant’s vested balance must be less than $5,000.
Cliff Vesting- full (100%) vesting after a specified length of service with no vesting (0%) prior to that time.
Code- the Internal Revenue Code
Compensation- the amount of a participant’s taxable and nontaxable wages that is considered for purposes of a certain employee benefit requirement.
Contribution- a payment made by an employee or employer to a qualified plan.
Conversion- the process of changing from one service provider to another.
Cross-Tested- a test for qualified plans with respect to the equivalent amount of benefits to determine that the plan does not discriminate in favor of highly compensated employees.
Custodial Account- an account established for the safekeeping of plan assets. The Custodian has no discretion or responsibility for managing those assets.
Deduction- amount that may be subtracted from gross income.
Deferred Compensation- the portion of a participant’s total compensation, which has been contributed to a plan.
Defined Benefit Plan- a plan that pays benefits based on a specific (defined) formula. Typically, benefits paid will depend on three factors: age, years of service, and compensation.
Defined Contribution Plan- the amount of the contribution is defined by the plan rather than the benefit. A participant knows how much goes into the plan, not the benefits that may eventually be paid out. A defined contribution plan has individual accounts for each participant in the plan, another key difference from defined benefit plans. Also, both employer and/or employees may contribute to a DC plan.
Department of Labor (DOL)- the non-tax (regulatory and administrative) provisions of ERISA are administered by the Department of Labor.
Direct Rollover- the direct trustee-to-trustee transfer of a lump sum distribution from a qualified plan to either an IRA or another qualified plan. A Direct Rollover is not a taxable event.
Direct Transfer- a distribution to an employee made in the form of a direct trustee-to-trustee transfer from a qualified retirement plan to an eligible retirement plan.
Disclosure- plan sponsors must provide plan participants access to certain types of information, including the summary plan descriptions, summary of material modifications and summary annual reports.
Diversification- spreading investments across different asset classes to minimize the risk of large losses.
Dollar-Cost Averaging- systematic buying of investments at regular intervals.
Early Distribution Penalty- a 10% excise tax assessed on distributions received from a qualified plan before certain conditions are met (generally before the participant attains age 59 ½).
Early Retirement- provision made in a retirement plan to allow employees who have met certain conditions, such as length of service and specified age, to retire prior to their regularly scheduled retirement age.
Efficient Market Theory - the principle that a large market with free access to relevant data will efficiently incorporate that data into the prices of all securities. It asserts that any new development is instantaneously priced into a security, thus making it impossible to consistently beat the market.
Elective Deferral (Salary Reduction)- a contribution made to a 401(k) plan by the employer on an employee’s behalf pursuant to the employee’s cash-or-deferred election.
Eligible Employee- any employee (having met age and service requirements) who is eligible to become a participant in a plan pursuant to the terms of the plan document.
Employee Retirement Income Security Act of 1974 (ERISA)- federal law governing the administration and management of employee benefit plans.
Employee Stock Ownership Plan (ESOP)- a profit sharing, stock bonus or money purchase pension plan in which the plan’s assets must be invested primarily in stock of the employer (company stock). An ESOP may borrow from the employer, or use the employer’s credit to acquire company stock (a leveraged ESOP).
ERISA 404(c) - a section of ERISA dealing with participant self-direction in a retirement plan. For an employer to qualify for this reduced fiduciary liability, the plan must comply with specific requirements regarding information about investment options, number and type of options, as well as an ability to move balances between those options on a reasonably frequent basis.
ERISA Rights Statement- ERISA requires that this document, explaining participant and beneficiary rights, be included with a summary plan description.
Excess Aggregate Contributions- after-tax participant contributions or matching employer contributions which cause a plan to fail the 401(m) actual contribution percentage or ACP non-discrimination test.
Excess Contributions- pre-tax contributions, which cause a plan to fail the 401(k) actual deferral percentage (ADP) non-discrimination test.
Exclusive Benefit Rule- the requirement that plan fiduciaries must discharge their duties solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and paying reasonable administrative expenses.
Fidelity Bond- an insurance policy that protects a participant’s interests in the event a fiduciary or other responsible person steals or mishandles plan assets.
Fiduciary- a person or institution with the legal responsibility to act in the best interests of the client on issues within the scope of their relationship.
Fiduciary Duty- responsibility to act with loyalty and prudence, and act in accordance with plan documents in the best interest of plan participants.
Forfeit/Forfeiture- the benefits that a participant loses if he or she terminates employment before becoming eligible for full retirement benefits under the plan. The difference between the total benefit and total vested benefit.
Form 5500- form, which must be filed with the DOL for each year in which a qualified plan has assets.
Graduated Vesting- a vesting schedule that provides for increasing levels of vesting with increasing length of service, until full vesting is achieved.
Hardship (Financial Hardship Distribution)- an in-service withdrawal from a retirement plan due to a participant’s immediate and heavy financial need that cannot be satisfied from other resources.
Highly Compensated Employee (HCE)- an employee who (1) is a 5% owner during the year or the preceding year or (2) received compensation in the prior year in excess of IRS established limits (adjusted for cost-of-living increases) and was a member of the top-paid group of employees.
Hour of Service- each hour for which an employee is paid or entitled to payment for the performance of duties for the employer.
Individual Retirement Account (IRA)- a non-forfeitable trust or custodial account established for the exclusive benefit of an individual and the individual’s beneficiaries. No part of the funds may be invested in life insurance contracts.
In-Service Distribution- distribution of retirement benefits to a plan participant while still employed. Most in-service distributions received before age 59 ½ will incur an additional 10% excise tax that applies to distributions from qualified plans, tax-sheltered annuities, and individual retirement accounts. A Plan cannot allow in-service distribution of salary deferrals before age 59 ½.
Integration- a feature of some qualified retirement plans that coordinates plan benefits or contributions with Social Security. Integration is sometimes referred to as permitted disparity.
Investment Adviser- individual or entity who provides investment advice for a fee.
Investment Manager- individual who is responsible for the selection and allocation of investment securities.
Investment Policy- a formal statement outlining the broad investment objectives of a plan.
IRS- Internal Revenue Service- the branch of the U.S. Treasury Department that is responsible for administering the requirements of qualified pension plans and other retirement vehicles.
Loan- if the plan allows, a participant may take a loan from the plan using the vested account balance as collateral. Qualified loans normally provide favorable interest rates for participants, but have restrictions regarding size and term, which prevents the loan, proceeds from being considered as current income or as an in-service withdrawal.
Lump-Sum Distribution- distribution from a qualified retirement plan of a participant’s vested balance within one taxable year. To be considered a qualified lump-sum distribution, it must be made because of the employee’s death, attainment of age 59 ½, separation from service, or disability.
Matching Contribution- a contribution made by the employer to the account of the participant in ratio to contributions made by the participant.
Modern Portfolio Theory - a method of choosing investments that focuses on the importance of the relationship among all of the investments in a portfolio rather than the individual merits of each investment. The method allows investors to quantify and control the amount of risk they accept and return they achieve.
Named Fiduciary- a fiduciary named in the plan instrument or identified through a procedure set forth in the plan.
Nondiscrimination- a retirement plan is a qualified plan only if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees.
Nonelective Contributions- a contribution to a cash-or-deferred arrangement (CODA) other than an elective deferral. Non-elective contributions are often referred to as profit sharing contributions.
Nonforfeitable Benefits- benefits that cannot be lost by a participant—“vested benefits”.
Non-Highly Compensated Employee (NHCE)- any employee (either active or former) who does not fall under the definition of a highly compensated employee.
Normal Retirement Age- established by the individual plan, though most plans specify age 65 as the normal retirement age.
Participant- an employee who meets the participation requirements for the plan and who is enrolled in the plan.
Participation- taking part in a retirement plan.
Participant Directed Account- a plan that allows participants to select their own investment options.
Plan- retirement vehicle by which an employer intends to provide long-term benefits for its employees.
Plan Assets- assets held by the retirement plan for the benefit of the participants. Plan assets are segregated from the employer’s property and held in a Trust for the exclusive benefit of Plan Participants.
Plan Document- the document that delineates the specific provisions of the plan or instrument, including all amendments.
Plan Sponsor- the entity responsible for establishing and maintaining the plan.
Plan Year- the 12 consecutive month period specified by the employer in the Adoption Agreement, or plan document. For most Plans, the Plan year is the calendar year, January 1 to December 31.
Profit-Sharing Plan- a plan or program for sharing company profits with the firm’s employees.
Prohibited Transaction- ERISA prohibits a fiduciary from causing a plan to enter directly or indirectly into transactions with certain persons defined as “parties-in-interest”. Prohibited transactions include: (1) sale, exchange, or leasing of any property between the plan and a party-in-interest; (2) lending of money or other extension of credit between the plan and a party-in-interest, (3) furnishing of goods, services, or facilities between the plan and a party-in-interest; (4) transfer to or use by or for the benefit of a party-in-interest of any assets of the plan; or (5) the acquisition, on behalf of the plan, of any employer security or employer real property not otherwise specifically exempted by law or regulation.
Prudent Man- requires that a plan fiduciary use the “care, skill and diligence” that would be used by a reasonably prudent person familiar with “such matters”.
Qualified Plan- a plan that is entitled to the tax benefits and protections of ERISA. In order to be “qualified”, a plan must: (1) have a written plan document, (2) be permanent, (3) communicate the provisions of the plan to eligible employees, (4) be established and operated for the exclusive benefit of plan participants or their beneficiaries, (5) have minimum participation (eligibility) standards, (6) be nondiscriminatory in coverage and contributions/benefits, and (7) have minimum vesting standards.
Qualified Domestic Relations Order (QDRO)- a domestic relations order that creates or recognizes the existence of an alternate payee’s right, or assigns 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. This is primarily encountered in a divorce proceeding.
Qualified Joint and Survivor Annuity (QJSA)- an immediate noncashable and nontransferable annuity for the life of the participant, with a survivor annuity for the life of the participant’s spouse.
Qualified Matching Contribution (QMAC)- an employer may make special 100% vested matching contributions to the plan on behalf of non-highly compensated employees to satisfy the ACP test, the ADP test, or both.
Qualified Nonelective Employer Contribution (QNEC)- an employer may make special 100% vested nonelective contributions on behalf of non-highly compensated employees to satisfy either the ADP test or the ACP test, or both, pursuant to regulations under the Code.
Rollover- a tax-free distribution from one retirement account to another, including individual retirement accounts.
Self-Directed- an account where the individual participant has elected to make all investment decisions.
Separation from Service- a person is separated from service when he ceases to be employed by the employer.
Spousal Consent- a spouse’s written consent is required in order for the participant to designate someone other than their spouse as beneficiary and, in some case, for loan applications.
Summary of Material Modifications- a document that summarizes significant changes to a plan. It may be furnished to participants and beneficiaries in place of a revised Summary Plan Description.
Summary Plan Description (SPD)- a simplified but comprehensive description of the plan provisions and ERISA-related material that must be provided to participants and beneficiaries. The SPD must be revised every five years if there are material modifications—and every 10 years even if no changes were made.
Taxable Wage Base- with respect to any year, the maximum amount of earnings which are considered wages for application of social security taxes.
Tax-Deferred Annuity- an insurance product for employees of certain not-for-profit organizations to elect to defer compensation in a qualified retirement plan.
Termination- a person who has been a participant, but whose employment has been terminated other than by death, total and permanent disability or retirement.
Third-Party Administrator (TPA)- specialized plan administration firms that generally act as an extension of the plan sponsor and perform recordkeeping and other ministerial duties.
Top-Heavy- a plan that primarily benefits key employees, generally when the value of accrued benefits for “key” employees is more than 60% of the value of total accrued benefits for the plan.
Trustee- the individual/institution holding legal title to the trust property.
Vesting, Vested, Vesting Schedule- pertaining to the non-forfeitable portion of any account or benefit maintained on behalf of a participant. The vested benefit is the portion of the benefit the Participant would be entitled to under the Plan if he terminated employment.
Year of Service- the computation period of 12 consecutive months during which an employee has satisfied the requirements specified in the Plan. A common requirement is to complete at least 1,000 hours of service during the computation period. | 
