Leading Retirement Solutions has prepared this glossary of retirement plan related terms that you may come across when sponsoring and managing a retirement plan. These definitions are not intended to represent the only way to define a particular term and you should seek more specific advice from a qualified professional (e.g. investment advisor).
401(k) Plan
A plan established by the Internal Revenue Code, Sec. 401(k). This type of plan allows participants to defer compensation into the plan, tax free.
Actual Contribution Percentage (ACP)
A test that must be performed annually by the Plan administrator to measure whether employer matching contributions and employee after-tax contributions discriminate in favor of highly compensated employees.
Actual Deferral Percentage (ADP)
A test that must be performed annually by the Plan administrator to measure whether elective contributions (salary deferrals) in a 401(k) plan discriminate in favor of highly compensated employees.
Adoption Agreement
This document contains eligibility, matching & contribution options, among others, that the employer (your Corporation) may select. The adoption agreement and its amendments must be signed by the employer to bring the plan in to effect.
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. 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.
Beneficiary
The individual identified by the accountholder as the recipient of the account balance in the instance of the accountholder’s death.
Catch-up Provision
A provision found in some 401(k) plans that allows an eligible employee who are at least age 50 to make higher annual contributions in the years prior to retirement.
Controlled Group
When two or more corporations have common ownership, a controlled group is created. These companies are counted as one entity for purposes of plan testing and qualification.
Custodian
The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities but has no role in portfolio management.
Cyclical Industry
An industry, such as automobiles, whose performance is closely tied to the condition of the general economy. The company (and their stock) does well during good economic times, and not as well during poor economic times.
Defined Benefit Plan
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.
Defined Contribution Plan
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.
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. Typically, doing these tests is called discrimination testing.
Disqualification
The act of a plan losing its tax-favored status with the IRS.
Eligible Employees
Any employee who has met the eligibility requirements set forth in the Plan document.
ERISA
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.
Expense Ratio
The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.
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 Employees (HCE) is an employee who received more than $90,000 ($85,000 in 2001) in compensation during the last plan year OR is a 5% owner in the company.
Matching Contributions
Contributions made by the employer in a 401(k) plan of a certain percentage or dollar amount that is matching to the employee contributions. The amount of match is specified in the plan document.
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.
Participant
An employee or past employee who has received benefits under an employer-sponsored plan.
Plan Administrator
The individual, group or corporation named in the plan document as responsible for day-to-day operations of the plan. 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 12-month period for which plan reporting and testing are completed.
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 pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.
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.
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.
Salary Reduction Plan (Cash or Deferred Arrangement)
A CODA is a defined contribution plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. They include 401(k), 403b and 457 plans.
Summary Plan Description (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.
Third Party Administrator
Leading Retirement Solutions provides third party administration services to you and your retirement plan and will assist you in completing the annual reporting requirements as required by the Internal Revenue Service (IRS) and Department of Labor (DOL).
Trust
A fiduciary relationship in which one person (the trustee) is the holder of the legal title to property (the trust property) subject to an equitable obligation (an obligation enforceable in a court of equity) to keep or use the property for the benefit of another person (the beneficiary).
Trustee
The individual(s) with legal authority to manage the assets of the plan.
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.
Year of Service
The 12-month period for which an employee must be continually employed for a specific number of hours in order to become eligible to participant in the plan.
THIS GLOSSARY IS INTENDED FOR GENERAL USE ONLY AND IT DOES NOT PROVIDE INVESTMENT, LEGAL, OR TAX ADVICE.