Glossary A-H
#s
401(a) plan
A 401(a) plan refers to any qualified retirement plan including a defined benefit, money purchase or profit-sharing plan.
401(a)(9)
That section of the Internal Revenue Code defining qualified plan distribution requirements, such as required beginning date and minimum distribution amounts.
401(k) plan
A qualified profit-sharing plan that contains a cash or deferred arrangement (CODA) allowing employees to defer income on a pre-tax basis. A 401(k) plan allows employee pre-tax contributions and may also permit employer contributions and/or employee voluntary after-tax contributions. Governmental employers may not sponsor 401(k) plans unless the plan was adopted prior to May 6, 1986.
457 plan
A deferred compensation plan maintained by state and local governments through which employees may defer a portion of their salaries until a later date, usually retirement. A growing number of state and local governments are making employer contributions to these plans.
A
aggressive growth fund
A mutual fund or diversified fund that invests in stocks that are expected to have rapidly increasing earnings, offering the potential for rapid returns. These stocks generally represent investments in smaller or newer companies. There is little or no emphasis on dividend income. These funds tend to be the most volatile types of funds, but may have significant long-term return potential.
allocation
The percentage of every contribution that the participant elects to invest in each of the plan’s investment fund options, subject to employer restrictions, for different contribution types (employer, employee and portable benefits/rollover sources). (See also “reallocation.”)
Alpha
A statistical measure that indicates the difference, positive or negative, between an asset’s return and its expected return, based on its beta relative to the return of a market benchmark. It is used as one measure of evaluating an assets risk adjusted performance.
alternate payee
A spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having the right to receive all or a portion of the benefits under a plan that would otherwise be payable to the participant.
amortization
(1)Reducing debt by repaying the principal with interest, usually according to a schedule established as one of the conditions of the loan. For example, a 30-year mortgage is amortized by regular monthly payments. (2)Amortization also refers to the practice of averaging the initial cost of an investment over its lifetime to calculate a real return.
annual percentage rate
The cost of credit, expressed as a simple annual interest. Abbreviated APR. (See “interest rate”)
annuity
A contract between a buyer and an insurance company. In return for payment, the insurer agrees to invest the money on a tax-deferred basis and pay an annuitant, usually the purchaser, a certain sum of money for a specified time, usually for the life of that person.
asset
Anything having commercial or exchange value owned by an individual, business or institution.
asset allocation
Dividing or apportioning of investment funds among different asset classes such as stocks, cash equivalents or bonds; or subsets of asset classes, such as corporate bonds, Treasury bonds and municipal bonds. Asset allocation affects both risk and reward in investing and is an important concept in financial planning and investment management.
asset allocation funds
Mutual funds that invest in a mix of stocks, bonds and cash equivalents. These funds typically shift assets among asset classes in response to changing market conditions.
asset-based fees
Charges consisting of a percentage of an account's assets and subtracted from the assets before share values are calculated. Investment management and plan administration fees are examples.
Asset Class Guidance
Provides participants with a recommendation on how to allocate their accounts among asset classes.
asset classes
Different categories of assets, according to their attributes, such as cash equivalents, stocks or bonds.
average contribution percentage (ACP) test
A nondiscrimination test outlined in IRC Section 401(m) for plans which include after-tax employee contributions. The test compares the average contributions of highly compensated employees to the average contributions of all other employees in the plan. Governmental plans are exempted from this test.
average deferral percentage (ADP) test
A nondiscrimination test outlined in IRC Section 401(k)(3) for 401(k) profit-sharing plans which allow pre-tax employee deferrals. The test compares the average deferrals of highly compensated employees to the average deferrals of all other employees in the plan. Governmental plans are exempted from this test.
B
balanced fund
A portfolio which seeks total return by investing in a combination of stocks, bonds and cash in proportions that vary within established percentage ranges.
beneficiary
A person designated to receive the assets remaining in an account following the designator's death. Also referred to as primary beneficiary. (See also “contingent beneficiary.”)
beta (b)
A statistical measure that indicates the degree of variability of an asset’s returns as compared to the returns of a market benchmark. More simply put, it tells whether one particular fund has more or less market risk than its benchmark, typically the S&P 500 Index. When beta is greater than one, a fund has greater sensitivity to market factors than the S&P 500 Index; when beta is less than one, it has less sensitivity.
bond
A fixed income debt security. Bonds may be issued by corporations or governments (both federal and municipal), and pay a set amount of interest, payable on a predetermined schedule over a predetermined number of years, until maturity. At maturity, the bond issuer repays the principal amount of the debt obligation, usually denominated in $1000 increments. Bonds are generally issued with maturities from one to 30 years. Bondholders are creditors of the issuer.
bond funds
Mutual funds or diversified funds invested entirely in fixed income securities. Bond funds generally seek to generate a steady stream of income. A bond fund may be invested in one segment of the bond market (such as Treasury bonds) or several, depending on the fund's investment objective.
C
cafeteria plan
A written plan under which all participants choose among two or more benefits that consist of cash and certain qualified benefits, including cash or deferred arrangement (CODA). Also referred to as a Section 125 plan.
capital appreciation
The growth in value of an asset due to an increase in its market price.
cash equivalents
Very short-term fixed income investments, such as Treasury bills and money market funds, which may be easily, safely and immediately converted into cash.
catch-up provision (457)
A provision for 457 participants nearing retirement to defer additional amounts of their current salary as a “catch-up” for contributions not deferred in previous years (“unused deferrals”).
In addition, 401, 457 and IRA participants age 50 or older may make additional catch-up contributions that are not related to unused deferrals.
collectively bargained plan
A plan maintained as a result of a collective bargaining agreement between employee representatives and one or more employers.
compounding
The effect of continual reinvestment of compound interest (See “compound interest” and “reinvestment”).
compound interest
Interest earned on principal plus the interest that was earned earlier. For example, $100 invested at 10% will earn $10 after one year for a total of $110. At the end of the second year, if compounded at the same 10% rate, the investor will earn $11 and the investment will total $121. (The additional $1 earned on the $10 earned earlier is the compound interest.) Interest can be compounded annually, quarterly, half-yearly, daily or other basis. In the case of stock investing, dividends may be compounded by buying more shares of the issuing stock or fund.
creditor
A person or institution to whom a money debt is owed.
constructive receipt
An IRS doctrine specifying that an investor becomes liable for taxes on a tax-deferred investment as soon as the investor acquires actual or constructive possession of the funds. The assets remain tax-deferred as long as the investor does not withdraw or dispose of them.
contingent beneficiary
Category of beneficiary(ies) named by the plan participant who are to receive plan death benefits should no primary beneficiary(ies) outlive the participant. (See also “beneficiary.”)
contribution
Payment made by the employer, participants or both into a retirement account. While the funds’ sources may vary based on the type of plan adopted, the employer sends the total payment by either check or wire to the Trust. (See also “contribution detail.”)
contribution detail
Information from the employer that accompanies contribution funds and identifies which participant accounts should receive specific amounts of the money as well as the source(s) of the money. The submission must be on the proper forms, EZLink, electronic data transfer (EDT) or magnetic tape and also reflect such changes as new participants and rehired participants. (See also “contribution.”)
contribution maximum
Limits to annual contributions or deferrals of salary to 401 or 457 plans. These limits are specified in various sections of the Internal Revenue Code. See specific plan information for the limits applicable to that plan.
contribution minimum
An administratively specified employee/employer annual contribution to a participant's account. RC 401 plans do not have minimums, nor do standard 457 deferred compensation plans. The 457 PTS plan has a minimum contribution of 7.5% of a participant's compensation.
conversion plan
A plan which results from an employer converting an existing defined benefit pension plan to a 401 defined contribution plan. Defined contribution plans have the advantage of portability, no funding liabilities, participant control of investments, ease of administration, and lower administrative costs.
covered service
Period of employment during which an employee is a participant in an employee benefit plan.
customer services
The division of RC associates who respond to client inquiries and assess how to better serve clients. Within the division, the Employee Services Unit, (800) 669-7400, answers employee account inquiries and provides assistance with transactions. The Employer Services Unit, (800) 326-7272, addresses current and prospective employer inquiries.
custodian
An organization (usually a bank) that holds securities for another party. The custodial bank for the VantageTrust Company is JPMORGAN CHASE BANK, NATIONAL ASSOCIATION ("Bank").
D
daily share price
The value of ICMA-RC shares calculated at the close of each business day at the New York Stock Exchange (4:00 PM, ET).
daily valuation
Calculating the value of an asset at the close of each business day.
date of employment
The first day a participant actually performed services for the employer. It is frequetnly used for such calculations as determining when the participant becomes fully vested in the employer’s plan. Abbreviated as “DOE.”
de minimis
Latin for “of little importance.”
For 457 plans, (1) accounts of less than $1,000 will be distributed to the participant at RC's discretion if certain conditions have been met (can be prior to separation from service) or (2) accounts of $1,000 to $5,000 may be distributed to the participant at the request of the participant or employer if certain conditions have been met (can be prior to separation from service). (See small balance withdrawals.)
Declaration of Trust of the ICMA Retirement Trust
This document provides the legal authority for the Trust to undertake the necessary investment actions on behalf of all employers who adopt the Trust. This declaration is included in both 457 and 401 plan adoption packages and must be executed by the legislative bodies governing the employers before any contributions may be accepted into the Trust. Informally known as the “trust agreement.”
default
Failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of an indenture. In cases of default, holders may make claims against the assets of the issuer in order to recoup their principal.
default payment date
The date that benefit payments to a 457 plan participant begin if no other beginning payment date is elected (generally age 65). 401 Plans use the IRS minimum required distribution date as the default.
deferred compensation plan
Among government employers, an eligible deferred compensation plan refers to a Section 457 plan. (See also “457 plan.”)
defined benefit plan
A plan which promises an employee a specific pension benefit upon retirement, usually paid as a lifetime annuity. The employer calculates the retirement benefit based on a formula that usually considers the employee's years of service, an average of the last 3-5 years' salary and a percentage multiplier. Funding comes from yearly employer contributions based upon actuarial calculations. The plans may also require or allow employee contributions. Because employer contributions are based upon estimates and projections, defined benefit plans can face the problem of under funding.
defined contribution plan
A plan which provides for an individual account for each participant and for benefits upon retirement based solely on the amount contributed to the participant's account and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account. Examples of such plans would include money purchase retirement plans, profit-sharing plans, stock purchase plans, and thrift and savings plans.
direct rollover
The transfer of all or part of the funds in a qualified plan directly to another qualified plan or an Individual Retirement Account. If a direct rollover is made, the distribution is not taxed. (See also “eligible rollover distribution,” “rollover.”)
disability
A condition documented by medical evidence of a certificate from the Social Security Administration permitting early vesting and account withdrawals before normal retirement age.
disclosure document
A brochure or booklet that contains information about securities offered by an issuer of those securities. Making Sound Investment Decisions: A Retirement Investment Guide is the Trust disclosure document.
discretionary employer contributions (401 profit sharing)
A method of funding a 401 profit sharing plan where the employer determines annually the amount of the employer contribution to the plan. The contribution may even be zero in a given year, although employer contributions must be “substantial and recurring.” Any employer contribution made to the plan in a year is credited to plan participants. A participant's share is generally determined by calculating what percentage of the total sum of the salaries for all plan participants is represented by the participant's individual salary.
diversification
The investment technique of spreading risk among securities and asset classes.
diversified funds
An investment fund that shares the same characteristics as a mutual fund, but that may not be registered with the Securities and Exchange Commission (SEC). (See “mutual funds”).
dividends
In stock investing, a portion of the company's earnings distributed in cash (or occasionally in the form of more stock) to stockholders, at the discretion of the company's board of directors. In mutual funds, dividends represent the accumulated investment income (from interest and dividends) from securities held in the portfolio, paid to shareholders.
dollar cost averaging
A method of investing a regular amount of dollars at set intervals of time, regardless of market fluctuations. The investor buys more shares when the market is low and fewer when the market is high, resulting in an overall cost that is lower than if the investor bought the same number of shares at set intervals.
domestic relations order
(See “qualified domestic relations order.”)
E
earnings
1. Gain or loss from investments, either from gain (loss) of principal or through accumulation of income from interest and/or dividends.
2. With respect to stocks, the net profit, after taxes from a company's business. (See “earnings per share”.)
3. In reference to participant earnings, earnings are generally equal to participant compensation and more specifically are defined in Section 2.09 of the ICMA Retirement Corporation Governmental Money Purchase Plan and Trust Basic Document and Section VII of the Governmental Adoption Agreement (Adoption Agreement).
earnings per share
Net profit (after taxes and interest paid to bondholders, etc.) allocated to each outstanding share of stock. For example, a corporation that earned $10 million last year and had 10 million shares outstanding would report earnings of $1 per share.
effective date
The date that a plan is implemented and from which contributions are required. This date may differ from the date the plan is adopted.
eligibility requirements
Specifications written into a plan document defining which employees are eligible to participate in the plan. An employer may specify such criteria as minimum age and years of service.
eligible domestic relations order
A domestic relations order recognizing the rights of an alternate payee to receive all or a part of a participant's deferred compensation account (457) at the time when the participant becomes eligible to receive a distribution.
eligible rollover distribution
A distribution from a qualified plan that may be rolled over to another qualified plan or an IRA. This is generally all taxable distributions (distributions of employer contributions, employee pre-tax contributions, and earnings) from a qualified plan except for annuities and other periodic payment streams of 10 years or greater and required distributions after age 70 1/2 or retirement. (See also “direct rollover.”)
emergency withdrawal
(See “unforseeable emergency withdrawal.”)
Employee Retirement Income Security Act (ERISA)
Abbreviated ERISA, it completely overhauled, in 1974, the federal pension law to protect the interests of retirement plan participants and their beneficiaries. ERISA established a new set of rules for participation in retirement plans, adding mandatory schedules for the vesting of benefits, fixed minimum funding standards, set standards of conduct for administering the plan and handling plan assets, required disclosure of plan information, and established a system for insuring the payment of pension benefits (defined benefit plans only). Governmental employers are exempt from ERISA.
equity
Net ownership of an asset. For example, an investor who owns a building worth $100,000 but must pay mortgage of $70,000 is said to have $30,000 of equity in the property. Since stocks represent ownership of a company, stocks are called “equity investments” and a stockholder is said to have equity in the corporation. (See also “stocks”).
equity income fund
A portfolio composed primarily of equities which seeks relatively high current income and growth of income.
ERISA
The Employee Retirement Income Security Act. In 1974, ERISA completely overhauled the federal pension law to protect the interests of retirement plan participants and their beneficiaries. ERISA established a new set of rules for participation in retirement plans, adding mandatory schedules for the vesting of benefits, fixed minimum funding standards, set standards of conduct for administering the plan and handling plan assets, and required disclosure of plan information. ERISA also established a system for insuring the payment of pension benefits (defined benefit plans only). Governmental employers are exempt from ERISA.
F
family of funds
A group of funds managed by the same investment management company. Each of the Vantagepoint Funds has a different objective (e.g., Growth Stock Fund, Core Bond Fund), and investors may generally shift assets between the funds at no charge.
fiduciary
A person, company, or association who exercises discretionary authority over the management of another’s assets or holds assets in trust for a beneficiary. The fiduciary renders investment advice for a fee, or is charged with the responsibility of investing the money wisely for the plan.
five-year rule
A default payment schedule that will deplete an account if the beneficiary of a deceased plan participant does not elect another payment schedule option.
foreign investments
(See “international investments.”)
forfeiture (401)
The recapture by the employer of nonvested employer contributions. Used to pay plan expenses or for future employer contributions.
forfeiture account (401)
An employer account under a qualified plan into which forfeited amounts from the plan are held. Under ICMA-RC’s Governmental 401 Plan, funds in the forfeiture account may be used by the employer toward future employer contributions to the plan, or plan expenses.
forfeiture reinstatement (401)
Reinstatement of the forfeited non-vested portion of a 401 plan for a participant who separated from service but was rehired within a five-year period.
Form 1099-R
Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is used to report to the IRS distributions from ICMA-RC’s 401 and 457 plans.
Form W-2
Wage and Tax Statement. Form W-2 is filed by employers with the IRS and state revenue bureau, annually, no later than the first business day of March. This form reports, among other things, an employee's gross and net wages from the employer during the previous calendar year, the amount of federal, state, and local income tax withheld by the employer, and the amounts contributed by the employee to a 457 and/or 401(k) plan.
Form W-2P
An obsolete form previously used to report distributions from annuities, pension and retirement plans, and IRAs. Such distributions (periodic and total) are now reported on Form 1099-R.
Form W-4P
Withholding Certificate for Pension or Annuity Payments. This form must be completed by a participant prior to ICMA-RC distributing assets that do not qualify as “eligible rollover distributions” from a 457 or 401 plan. By completing this form the participant tells RC how much to withhold from the distribution for federal income taxes. This form is also used to change the amount of withholding from periodic payments. Participants may elect not to have income tax withheld from distribution (except in the case of mandatory withholding), but must do so by filing the appropriately completed form. If a participant does not submit a Form W-4P, ICMA-RC will withhold federal income taxes based on a filing status of married with three exemptions.
Fund Advice
Provides participants with a recommendation on the specific funds offered under their employers' plan in which to invest.
forward averaging
An option for some 401 plan participants who elect to receive a single, large, lump-sum distribution payment. Participants who are at least 59-1/2, have been in the plan at least 5 years, and have never used the provision previously may choose to treat the distribution as a 5 or 10 year event for tax purposes. Repealed effective for tax years beginning on or after January 1, 2000.
fund transfer
A transfer of all or a portion of a participant’s assets in one or more contribution types from one or more investment options to one or more other investments. Fund transfers, unless restricted by the employer, may be completed either by phone (through VantageLine, an Investor Services representative or VantageLink (Account Access) or by submitting a completed 401 Employee Fund Transfer Form. (See “reallocation.”)
fund transfer rescission
Available through VantageLine, through VantageLink or through an Investor Services associate, this option allows participants to negate pending transfer requests.
fund transfer restriction
1) Limitations placed by investment contract providers on direct transfers from the PLUS fund to “competing funds,” such as the Vantagepoint Money Market Fund, the VantageTrust Cash Management Fund, Certificates of Deposit and other short-term cash or bond funds. The restrictions permit indirect transfers from the PLUS Fund into a “non-competing fund.” After 90 days in the “non-competing fund.”, transfers are permitted to include competing funds.
2) Limitations placed on transfers to the three Vantagepoint “international” funds to protect long-term investors in these funds.
3)Limitations placed on transfers to other funds to protect their long-term investors.
G
good order
A contribution is in “good order” if the remittance amount and contribution detail reconcile and are available at the same time. The contribution detail must also conform to certain specifications for tape, diskette, electronic data transfer (EDT) or submittal form. Contributions received “in good order” will receive same-day participant investment of funds.
governmental plan
A plan established or maintained for its employees by the federal or any state government, political subdivision, agency or instrumentality. The term also includes plans sponsored by railroads or international organizations exempt from tax under the International Organization Immunities Act.
growth fund
A portfolio of stocks that emphasizes shares of companies expected to exhibit higher than average growth in earnings usually with little or no emphasis on dividend income.
growth stock
An equity investment in a corporation that has exhibited faster-than-average growth in earnings. Growth stocks tend to represent expanding firms with new products or solid market niches. They also generally pay little or no dividends and may be more volatile than other stocks.
Guided Pathways®
ICMA-RC's suite of investment advisory services, including Asset Class Guidance, Fund Advice and Managed Accounts, designed to provide participants with the appropriate planning and investment assistance based on their own investing comfort level and how active they want to be in managing their retirement accounts.
H
hardship withdrawal
401(k) plan withdrawals allowable due to immediate and heavy financial needs of the participant where no other resources are available. Employers must have elected this plan option in the plan adoption agreement. (See “unforeseeable emergency withdrawal” for 457 plans.)