401(k) Plan
A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401(k) plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401(k) plan carries many unique advantages for both employer and employee.

403(b) Plan                                      
Section 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares.

Actual Contribution Percentage (ACP)
In a 401(k) plan, this is the result of the average of ratios of combined contributions to compensation for both highly compensated and non-highly compensated employees. Each employee’s ratio is calculated and then averaged for the group.

Actual Deferral Percentage (ADP)
This is the proportion of a plan participant’s compensation that is contributed to a 401(k) plan as an employee elective deferral.

Blackout Period
There is typically a period during which participants are not permitted to make changes in their investment selections, when a plan sponsor decides to switch from one plan vendor to another. This is known as the blackout period. Once the blackout period commences and until it ends, participants cannot direct the investments in their accounts. Blackout periods can last up to 60 days.

Catch-up Provision
A provision found in some 401(k) plans that allow an eligible employee who is at least age 50 by the end of the plan year, to make higher annual contributions.

Compliance testing
Testing required by the IRS to make sure that the 401(k) plan is fair to both highly compensated and non highly compensated employees.

Defined benefit
A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Defined benefit plans are guaranteed by Pension Benefit Guarantee Corp. (PBGC).

Defined contribution
A defined contribution plan does not promise a specific benefit at retirement, but does provide regular, set contributions to an investment fund. Defined contribution plans tend to be less expensive than defined benefit plans.

Distributions and withdrawals
When money is withdrawn from a 401(k) plan, the withdrawal is referred to as a distribution. 401(k) plan assets can be withdrawn without penalty after age 59 ½. Employees are required to begin taking distributions after age 70 ½ with a few exceptions.

Employer matching contribution
The amount, if any, that the employer contributes to the employee's 401(k) account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.

Employer discretionary contributions
Some employers make an additional contribution at plan year end in the form of increased matching contributions and/or a profit sharing contributions. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis.

ERISA
Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pension and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.

Fiduciary
An individual or an institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. The relationship between a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, a trustee and a beneficiary, a person who exercises discretionary control or authority over management of a benefit plan, each is an example of fiduciary relationship.

Highly Compensated Employee
A Highly Compensated Employee (HCE) is an employee who received more than $95,000 in compensation during the last plan year OR has ownership of greater than 5%.

In-service Withdrawal
A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans.

• In-service withdrawals of elective deferrals (employee salary reduction contributions) are prohibited by law prior to age 59 1/2. While allowed by law after that age, most plans do not allow it.
• In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but in most plan it is prohibited.

Integration
A pension design tool in which contributions reflect the existence of Social Security benefits. In this process, FICA taxes are considered part of the contribution to the pension fund. Since Social Security provides a greater percentage benefit to lower paid employees, integration allows the company to increase contributions to higher paid employees.

Key Employee

A key employee is an employee (including former or deceased employees), who at any time during the prior plan year was:
1. An officer whose annual compensation from the employer exceeded $135,000;or

2. An employee owning more than 5% of the business; or
3. An employee owning more than 1% of the business, and whose compensation exceeded $150,000 for the plan year.

Lifestyle Fund
A mutual fund that maintains an asset allocation based on the expected retirement age of the investor; generally, the investor's portfolio will be shifted into less-risky assets as s/he grows older, or closer to the time when s/he wants to withdraw his investment.

Money Purchase Pension Plan (MPPP)
A defined contribution plan in which employer contributions are mandatory and are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.

Non-Discrimination Testing
All tax qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, every tax qualified retirement plan (like a 401(k)) must pass a series of numerical measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test.

Non-Highly Compensated Employee (NHCE)
This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.

Non-Qualified Deferred Compensation Plan
A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer’s creditors.

Non-qualified Plan
A pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.

Participant contributions
The dollars that employees contribute to their 401(k) plans.

Participant Directed Account
A plan that allows participants to select their own investment options. See Participant Directed Investing.

Participant Directed Investing
In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.

PBGC
Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

Plan Administrator
The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administrator if no other entity is named.

Plan Sponsor
The entity (generally the employer) responsible for establishing and maintaining the plan.

Plan Vendor
Companies that administer, service and/or sell 401(k) plans. They are generally employed by the plan sponsor.

Plan Year
The twelve month period in which the plan operates.

Profit sharing plan
A defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a retirement fund in lean years.

Prohibited Transaction
Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. This includes transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction.

Qualified Domestic Relations Order (QDRO)
A judgment, decree or order that creates or recognizes an alternate payee’s (such as former spouse, child, etc.) right to receive all or a portion of a participant’s retirement plan benefits.

Qualified Plan
A private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal.

Rollover
An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.

SPD
Summary Plan Description for ERISA employee benefit plans. ERISA requires a Summary Plan Description (SPD) be distributed to each plan participant and to each beneficiary receiving benefits under the plan as follows: for existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.

Vesting
The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.