Lingo

Many investors who actively participate in the market through their employer-sponsored retirement plan have trouble keeping up with the lingo thrown around in their employee meetings. Worse, without that financial literacy, it can be tough to make informed decisions about their retirement plan. If that described you, learning the industry language can help. The following is a sampling of the most common retirement plan terms—so you can start talking like a pro and, hopefully, increase your retirement income, too.

  • 401(k) plan: A tax-qualified, defined contribution (DC) retirement plan that meets the requirements of Section 401(k) of the Internal Revenue Code (IRC).
  • 403(b) plan: A retirement plan, similar to a 401(k) (see above), available to tax-exempt organizations including charities, hospitals, educational institutions, religious organizations and public schools or universities.
  • Age 50+ Catch-up contributions: Additional money participants ages 50 and older may invest in their accounts, over the annual deferral limits, to defer pretax amount.
  • Automatic enrollment: A plan design feature that enrolls eligible employees into their employer-sponsored retirement plan at a certain percentage of eligible compensation, unless the employee designates a different contribution amount or opts out of the plan.
  • Automatic escalation: A plan design feature that increases employees’ deferral rates at a specified time, unless an employee opts out.
  • Defined benefit (DB) plan: In this plan—also called a pension plan—employee benefits are based on a defined formula using factors such as salary history and duration of employment, and retirees are guaranteed a set benefit. Contributions to the plan are made by the employer.
  • Defined contribution (DC) plan: A retirement plan that specifies the annual contributions to the plan and can accept contributions from both employer and employee. Benefits are not set but determined by the contributions over time and the earnings or expenses to the account.
  • Discretionary contribution: An optional employer contribution to the retirement plan, such as for profit sharing.
  • Elective deferral contribution: An arrangement used in defined contribution employer-sponsored retirement plans whereby participants choose to set aside part of their compensation as a contribution to their retirement plan.
  • Hardship withdrawal: A participant’s withdrawal of elective deferral contributions in the event of an immediate and heavy financial need, subject to ordinary income tax and a 10% early withdrawal tax.
  • Matching contribution: An employer contribution to the plan, allocated based on the employee’s contribution. Employer matching contributions may be discretionary or required and can be made during the year or annually.
  • Minimum required distributions: Under the IRC, a portion of an account that must be paid annually to participants, whether retired or not, who have attained age 70.5.
  • Plan administrator: The person, or team, identified in the plan document, who is responsible for selecting the type of plan and investment options, as well as generally running the plan.
  • Plan document: A written instrument, required for all plans subject to the Employee Retirement Income Security Act (ERISA), under which the plan is established and operated, and which describes the plan’s terms and conditions in relation to its operation and administration.
  • Plan fiduciary: Any person who exercises discretionary authority or control over the management or administration of the plan, or plan assets, or who gives investment advice for a fee or other compensation with respect to the plan’s assets.
  • Recordkeeper: The firm that maintains accounting records for each participant, allocates plan assets among participants and processes participant transaction requests.
  • Replacement ratio: The percentage of an employee’s income needed annually throughout retirement.
  • Rollover: The transfer of funds in a participant’s account by the plan administrator to a new plan or individual retirement account (IRA) when a participant leaves an employer. This preserves the benefits and triggers no tax consequences if done promptly.
  • Roth IRA or 401(k): Roth retirement plans permit post-tax plan deferrals.
  • Summary plan description (SPD): A document provided by the plan administrator that includes a plain-language description of the plan’s important features. Participants must be informed of material changes either through a revised summary plan description or a separate document called a summary of material modifications (SMM).
  • Vesting: A participant’s nonforfeitable right to a percentage of his benefits accrued under the plan, based on length of service with the employer and the plan’s vesting schedule. Employee deferrals and after-tax contributions are always 100% vested.