A plan permits a fund to pay some or all of the costs of distributing its shares to the public. Some of these plans provide for payment of specific expenses, such as advertising, sales literature, and dealer incentives. Others are simply intended to protect the fund against possible claims that certain operating costs, such as administrative or advisory costs, constitute indirect forms of distribution expenses. Both load and no-load funds may adopt 12(b)1 plan. They are not hidden charges but are clearly explained in the fund’s prospectus and semi-annual and annual reports. Many funds have 12(b)1 plan that has not been activated. The majority of such projects have maximum yearly charges of 0.25% (one-quarter of 1%). 12(b)1 charges are included in the total expense ratio figures provided in a fund’s literature. Some fund’s expense ratios, including management fees and 12(b)1 charge, may be lower than the ratios of funds that do not have 12(b)1 plans.

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

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

Optional regulation on plan sponsors provides specific information and fund choices so plan participants can make informed decisions about their retirement plan investments.

The amount credited to a bond or other fixed-income security between the last payment and when the security is sold or any intermediate date. The buyer usually pays the seller the security’s price plus the accrued interest.

In a 401k or 403b plan, this results from the average ratios of matching contributions to compensation for both highly compensated and non-highly compensated employees. Each employees’s ratio is calculated and then averaged for the group.

The proportion of a plan participant’s compensation contributed to a 401k plan as an employee elective deferral.

A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

Increase in the value of an investment over time.

The price a seller is willing to accept for the security; also called the offer price. This price is usually higher than the Bid price.

A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

Dividing your investment portfolio among the major asset categories. The most important decision you will make.

A common trust fund or mutual fund spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change. This gives small investors far more diversification than they could get allocating money on their own.

The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.

A firm’s financial statement provides a picture of its assets, debts, and net worth at a specific point in time.

A common trust fund or mutual fund maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.

A measure of a stock’s risk relative to the market, usually the Standard & Poor’s 500 indexes. The market’s beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent, and when the market falls, the stock will fall to a greater area. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

The price a buyer is willing to pay for a security. This price is usually lower than the Ask price.

When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days.

A certificate of debt issued by a company or the government. Bonds generally pay a specific interest rate and pay back the original investment after a specified period.

The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.

A 401k or 403b plan package includes all investment, administration, education, and recordkeeping sold as one unit. This contrasts with a basic plan in which the plan sponsor can hire each component provider separately.

Uncertainty of an investment’s return due to a fall-off in business that is firm-related or industry-wide.

A strategy where the stock portion of your portfolio is fully invested in the stock market at all times.

The right to purchase stock at a specified (exercise) price within a specified period.

A bond that can be redeemed by the issuer before its maturity. Usually, a premium is paid to the bond owner when the bond is called.

An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a “realized” capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year).

A cash balance plan is a type of defined benefit retirement plan that combines features of both defined benefit and defined contribution plans. It defines the promised benefit in terms of a stated account balance. In a cash balance plan, an employee is guaranteed a certain sum of money upon retirement, which is a combination of employer contributions and compound interest over time. The employee can choose to either annuitize the benefits or take them as a lump sum.

See Salary Reduction Plan.

A provision found in some 401k or 403b plans allows an eligible employee who is at least age 50 to make higher annual contributions in the years before retirement.

A bank deposit that pays a specified rate of interest for a certain period.

The unethical and excessive trading of a client account to generate commissions for a broker may not be in the client’s best interests. Not only does the client pay high commissions, but they also get stuck with high tax bills due to the short-term holding of assets.

A retirement plan with “Cliff Vesting” vests 100% of employer contributions after a specified number of years of service. In a 3 year cliff schedule, after three years of service, benefits must be fully vested.

Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management, and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.

Broker’s fee for buying or selling securities.

An investment representing an ownership interest in a corporation.

Testing is required by the IRS to make sure that the retirement plan is fair to both highly compensated and ordinary employees.

The ability of an asset to generate earnings that are then reinvested and develop their own earnings (earnings on revenues).

The amount expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.

Current assets, including cash, accounts receivable, and inventory, are divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller existing assets relative to current liabilities, the greater the risk of credit failure.

Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

The bank or trust company maintains a retirement plan’s assets, including its portfolio of securities or some record of them. Provides safekeeping of protection but has no role in portfolio management.

An industry, such as automobiles, whose performance is closely tied to the condition of the general economy. The company (and their stock) do well during good economic times and not during poor economic times.

Long-term debt divided by stockholders’ equity. The ratio identifies the relationship of debt to ownership interest in the firm’s financial structure. A measure of financial risk.

The “Deemed IRA” (also called a “Sidecar IRA”) was part of “The Economic Growth and Tax Reconciliation Act of 2001” (EGTRRA), although the concept has been around since the early 1980s. Basically, if your 401k plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a “Deemed IRA,” which is a separate account established under the plan.

A bond with a coupon rate far below currently available on investments and whose value is at a significant discount from par value.

The risk is that a company will not pay the contractual interest or principal on its debt obligations.

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 PBGC.

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

The increase in purchasing power due to a general decrease in the prices of goods and services.

Decrease in the value of an investment over time.

A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a “trustee to trustee” transfer. The transfer is made without any funds being sent directly to the plan participant.

A bond that is valued at less than its face amount.

A stockbroker who charges a reduced commission and provides no investment advice.

The interest rate used in discounting future cash flows; also called the “capitalization rate.”

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 401k) must pass a series of numerical measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Annual Additions, and Top-heavy Test. Typically, doing these tests is called discrimination testing.

When money is withdrawn from a retirement plan, the withdrawal is referred to as a distribution. Retirement plan assets may be able to bve withdrawn without penalty after age 59 1/2. Employees who separated from service or direct/indirect owners are required to begin taking distributions after age 73.

The practice of spreading risk by investing in many securities that have different return patterns over time. When one investment yields a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if a business is poor or if the corporation’s directors decide to retain earnings to invest in business operations.

Annual dividends per share divided by annual earnings per share.

An indication of the income generated by a share of stock. Annual dividends per share divided by price per share. The dividend yield plus capital gains percentage equals total return.

A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average cost for all shares or units purchased.

The price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham’s formula relating value to recent earnings and expected earnings growth rates.

The net income of the firm is divided by the number of common stock shares outstanding.

Earnings per share for the most recent 12 months divided by the market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.

Some employers also contribute at the plan-year end in increased matching contributions and/or a profit-sharing (nonelective) contribution. These employer contributions are considered a tax deductible business expense and also grow on a tax-deferred basis.

The amount, if any, that the employer contributes to the employee’s 401k or 403b account. Matching contributions are usually configured to provide a set percentage of an employee’s contribution up to a fixed limit.

Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.

An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

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

Returns above the risk-free rate or over a market measure such as the S&P 500 index.

The average of a probability distribution of possible returns.

The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charge, if any, the cost of shareholder mailings, and other administrative costs. Expense ratios may function as a fund’s size rather than its success in controlling expenses. The ratio is listed in a fund’s prospectus.

The stated principal amount of a debt instrument.

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 the management of a benefit plan, each is an example of fiduciary relationship.

An accounting period consisting of 12 consecutive months.

Investments represent an IOU from the government or a corporation to the investor and offer specific payments at pre-determined times. Public and private bonds, government securities, and 401k guaranteed accounts are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

Investments represent an IOU from the government or a corporation to the investor and offer specific payments at pre-determined times. Public and private bonds, government securities, and 401k guaranteed accounts are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.

This valuation of stocks is based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company’s underlying worth and potential for growth.

This valuation of stocks is based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company’s underlying worth and potential for growth.

A municipal bond backed by the full faith, credit, and “taxing power” of the issuing unit rather than the revenue from a given project.

Fixed-income securities represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

Selling privately held shares to new investors for the first time.

A measure of output from United States factories and related consumption in the United States. It does not include products made by US companies in foreign markets.

Debt instruments sold in large denominations issued by Insurance Companies and often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk. The company issuing the GIC makes the guarantee, not the US Government.

A Highly Compensated Employee (HCE) is an employee who received more than a certain threshold in compensation during the last plan year OR is a 5% owner in the company.

Income plus price appreciation during a specified period is divided by the cost of the investment.

A withdrawal from retirement savings plans 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) or safe harbor contributions are prohibited by law before 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 before age 59 1/2, but most plans prohibit it.

Payment of interest and dividends earned on a fund’s portfolio of securities after operating expenses are deducted.

A common trust fund or mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that usually pay high dividends and interest.

The financial statement of a firm that summarizes revenues and expenses over a specified period; a statement of profit and loss.

A statistical measure of the changes in a portfolio representing a market. The Standard & Poor’s 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the US.

A common trust fund or mutual fund seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, often the Standard & Poor’s 500-stock index.

A personal, tax-sheltered retirement account available to wage earners not covered by a company retirement plan or, if covered, meet certain income limitations.

A provision in the IRA law allowing individuals who receive lump-sum payments from a pension or profit-sharing plans to “rollover” into, or invest that sum in, an IRA. IRA funds can be “rolled over” from one investment to another.

The loss of purchasing power is due to a general rise in the prices of goods and services.

Uncertainty over the future real (after-inflation) value of your investment.

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 more significant percentage benefit to lower-paid employees, integration allows the company to increase contributions to higher-paid employees.

What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other forms of IOU.

A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

Bond purchased for speculative purposes. They are usually rated “BB” and lower, and they have higher default risk.

A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. (Also know as HR 10 Plans.) Keogh plans can be funded with mutual fund shares.

An economic indicator that changes directions after business conditions have turned around.

An economic indicator that changes direction in advance of general business conditions.

An order placed with a broker to buy or sell at a price as good or better than the specified limit price.

The degree of ease and certainty of value with which a security can be converted into cash.

The use of borrowed money to purchase securities (buying “on margin”).

Many common stock shares outstanding times share price. Provides a measure of firm size.

An order is placed with a broker to buy or sell a security at whatever the price may be when the order is executed.

The volatility of a stock price relative to the overall market or Index as indicated by beta.

The feeling, sentiment, or tone of a market. This is usually shown by the activity or price movement of the securities represented within the market. For example, a bullish market sentiment would be indicated by rising prices and strong demand for securities, while a bearish sentiment would be indicated by falling prices and a lack of demand for securities.

Attempting to leave the market entirely during downturns and reinvesting when it heads back up.  

The length of time until the principal amount of a bond must be repaid.

A common trust fund or mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including bank certificates of deposit, commercial paper, US government securities, and repurchase agreements. Money funds make these high-interest securities available to the average investor seeking immediate income and high investment safety.

A defined-contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from the separation of service before full vesting can be used to reduce the employer’s contributions or be reallocated among remaining employees.

An open-end investment company that buys back or redeems its shares at current net asset value. Most mutual funds continuously offer new shares to investors.

National Association of Securities Dealers Automated Quotations System. This computerized system provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.

The current market worth of a mutual fund share. Calculated daily by taking the funds total assets securities, cash, and any accrued earnings deducting liabilities, and dividing the remainder by the number of shares outstanding.

Rules denying an employer, employee, or both the benefit of tax advantages if the plan discriminates in favor of highly compensated or key employees as demonstrated by government-specified tests.

This group of employees is determined based on compensation or ownership interest. See Highly Compensated Employees.

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

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

A transaction involving fewer shares than in a “round” lot, which for most stocks is 100 shares.

A defined contribution plan for which no plan sponsor or other plan fiduciary is willing to act concerning the plan.

A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).

A security, usually a stock, has had a sharp rise, usually due to vigorous buying, making prices too high. This is the opposite of being oversold.

Security, usually a stock (also sometimes a whole market), is believed to have declined to an unreasonable level due to vigorous selling. This is the opposite of being overbought.

The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.

The dollars that employees contribute to their 401k or 403b plans..

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

In this case, the employee decides how to invest their funds. The company’s responsibility is to offer various investment opportunities to make investments according to their long-term goals and risk.

Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.

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.

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

Every qualified Plan must have an entity or person who “sponsors” the Plan and takes on the responsibility for the Plan’s operation. A Plan Sponsor is a designated party (usually a Company or Employer) that sets up a retirement program for the entity’s own employees. The Plan Sponsor does not have to be a company, employer or a person, but could be an Independent Fiduciary, a Professional Employer Organization (PEO), a Chamber of Commerce, a Union Organization, to name a few. The primary responsibility of the Plan Sponsor with regard to a retirement program is to implement or establish a qualified retirement plan.

Companies that administer, service, and/or sell retirement plans. They are generally employed by the plan sponsor.

The calendar or fiscal year for which plan records are maintained.

Upon termination of employment, an employee transfers pension funds from one employer’s plan to another without penalty.

The group of individual securities held by a person or an institution.

A bond that is valued at more than its face amount.

The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

Market price per share is divided by the firm’s earnings per share. A measure of how the market currently values the firm’s earnings growth and risk prospects.

A measure of stock valuation relative to net assets. Market price per share divided by book value (tangible assets less all liabilities) per share. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.

The original amount of money invested or lent, as distinguished from profits or interest earned on that money.

Net earnings after taxes divided by sales. Measures the ability of a firm to generate profits from sales.

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 pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.

Computer-based trigger points are established in which large volume trades are indicated. The technique is used by institutional investors.

Activities regarding the treatment of plan assets by fiduciaries are prohibited by ERISA. This includes transactions with a party-in-interest, including the 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.

The written statement discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus. You should always read the prospectus on any mutual fund before investing.

The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) specific actions can be delegated to other agents and fiduciaries. ERISA [ 404(a)(1)(C) ] generally follows the approach of the Prudent Investor Rule.

A rule initially stated in 1830 by the Supreme Judicial Court of Massachusetts in Harvard College v. Amory [ 9 Pick. (Mass.) 446 ], that, in investing, all that can be required of a trustee is that he conduct himself faithfully and exercise sound discretion and observe how men of prudence, discretion, and intelligence manage their own affairs not regarding speculation, but concerning the permanent disposition of their funds considering the probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as a part of state fiduciary law, usually with certain different specifics from state to state.

The right to sell stock at a specified (exercise) price within a specified period.

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

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.

The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

The price-performance of a stock is divided by the price performance of an appropriate index over the same period. A measure of price trend that indicates how a stock is performing relative to other stocks.

The rate of return demanded to induce investors to invest in a security.

The percent of earnings retained in the firm for investment purposes.

Consists of income plus capital gains (or losses) relative to investment.