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Glossary of Retirement Plan Terms

401(k) - Refers to the specific section of the Internal Revenue Code that permits employees to contribute a portion of their compensation to a qualified plan on a Pre-tax basis. These plans are also called "cash or deferred arrangements". Amounts contributed to the plan are not taxable to the participants until withdrawn. Amounts to be deposited are determined by the employee. The employer permits formula matching, discretionary matching, pure discretionary or profit sharing contributions, and formula contributions. The Plan Document controls this. Fiduciary responsibilities rest with the employee. 

 

Accrued benefits - The benefits a plan participant has already accrued in a defined benefit plan, based on his or her salary and service to date. 

 

Cash balance plan - A type of defined benefit pension plan that uses a formula that is different from a traditional plan to determine benefits. The plan is considered a defined benefit plan because the employer bears the investment risks and rewards and the mortality risk if the employee elects to receive benefits in the form of an annuity.

 

Defined benefit pension plan - A plan that specifies the pension benefit the employee will receive, usually as a function of one or more factors such as age, years of service or compensation. The employer’s annual contribution is determined on an actuarial basis, taking into consideration the employee’s age and salary history, the performance of the fund’s investments and ERISA requirements.

 

Deferred Compensation - A contractual commitment by an employer to an employee to pay compensation in a future tax year.

 

Defined contribution plan - A plan that maintains an individual account for each participant and specifies how contributions to the account are determined instead of specifying the amount of benefits the individual will receive. Individual account balances are based on employer and employee contributions, investment experience and allocated forfeitures.

 

Discretionary - The employer has the option of making contributions to the plan at his choice regardless of the profit level of the corporation that year.

 

Elective Contributions – This type of contribution is usually a deferral or percentage of a participant’s salary.  When an eligible employee decides to contribute a percentage of their paycheck to the 401(k) plan they are making an “elective” contribution.

 

Enrollment Meeting - Group meetings with employees to explain the employer's 401(k) plan and the investment accounts available.

 

ERISA - Employee Retirement Income Security Act.

 

Extranet - An extension of an organization's intranet, especially over the World Wide Web, enabling communication between the institution and people it deals with, often by providing limited access to its intranet.

Hardship Withdrawals - A means by which a participant may withdraw money from their 401(k) account prior to attaining age 59½.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

• Un-reimbursed medical expenses for you, your spouse, or dependents.

• Purchase of an employee’s principal residence.

• Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.

• Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.

• Beginning on January 1, 2006, you will also be able to make a hardship withdrawal for funeral expenses and repair of a primary residence.

Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back. - Read More

Highly Compensated Employee - An employee owning more than five percent of the company or earning more than $100,000.

 

Interest credits - In addition to annual pay credits (see below), a participant’s account under a cash balance formula is credited annually with interest. The interest rate the plan uses may be fixed or variable, although many cash balance plans use a variable rate for interest credits, linking the rate to an index such as one-year Treasury bills. 

 

Loans - Allows participants to access their plan funds without extra tax costs or penalty. The plan must specifically permit loans before participants may borrow.  Check your plan SPD.

 

Matching Contribution - An employer contribution to a plan that is allocated on the basis of the employee's elective contribution. A matching contribution may be either mandatory or discretionary.

 

Measurement date - The date plan assets (stocks and bonds) and plan obligations (pension liabilities) are determined based on actuarial assumptions.

 

Negative plan amendment - Plan amendments that reduce a company’s projected benefits obligation to the benefits the participant has already earned. Such amendments generally reduce an employer’s annual pension cost. ERISA regulations do not permit a company to reduce a participant’s already accrued benefits. 

 

Non-qualified Plan - A written plan that allows an employer to discriminate in favor of highly compensated employees.

 

Participants - Individuals who actually make deposits into their 401(k) plan. Not all employees become participants or are eligible to participate.

 

Participant Directed - The plan participants are provided the opportunity to direct their own retirement assets/dollars by making investment choice in funds that more closely meet their specific goals and objectives.  Trustee Directed plans do not permit the participants to invest their own assets, but rather, the assets are invested in investments selected by the plan's Trustees.

 

Participant Meetings - Scheduled meetings between Plan Consultants and Participants to review and update individual retirement plan goals and objectives.

 

Plan Document – The plan document is filed with the Department of Labor and the IRS and governs the plan sponsor, the Trustees, investment providers, plan administrators, and participants.  This document is what provides your plan its tax qualified status.  The Summary Plan Description or SPD provides an overview of the plan document.

 

Plan Sponsor - A Business or Employer Organization that sponsors the qualified retirement plan and is ultimately responsible for its administration.

 

Pre-tax - Contributions are made to a retirement plan before taxes are calculated. Your gross pay is reduced by the amount contributed to a retirement plan.

 

Profit Sharing - A profit sharing contribution is a percentage of compensation paid by the employer to all employees meeting eligibility requirements set by the plan document. An employer is not required to make a profit sharing contribution however, at the employers discretion, may do so on an annual basis. While the money is deposited to each eligible employee account and you may generally invest it as your money, you must satisfy vesting requirements before you fully control a profit sharing contribution.

 

Qualified Plan - A plan that meets Internal Revenue Code and IRS regulatory requirements that entitles the employer to an immediate tax deduction when benefits are funded.

 

Pay credits - After a company determines a participant’s opening account balance under a cash balance formula, the account is credited annually with an amount based on a percentage of the participant’s annual compensation. These pay credits may be level for all age groups or graduated—lower for younger age groups and higher for older age groups. 

 

Rebalancing - A process by which the system will automatically create transfers between investment funds to achieve the desired asset allocation. Rebalancing can be executed a single time, or established so that transfers will automatically occur at certain dates.

 

SPD - Acronym for Summary Plan Description (see below).

 

Summary Plan Description – The plan’s Summary plan Description summarizes the Qualified Plan Document and is generally does not provide the detail available in the Plan Document.  Also referred to as the SPD it is available to all persons eligible to participate in the plan.  If you do not have your SPD you may request one form your plan sponsor.

 

Tax-deferred - Federal income tax is not paid on contributions or earnings to a retirement plan until the money is withdrawn.

 

Top Heavy Plan - A plan that provides more than 60 percent of its aggregate accrued benefits or account balances to "key" or "highly compensated" employees.

 

Transition benefits - Additional benefits the plan sponsor provides to certain employees when the plan is amended or upon other circumstances, such as the sale of part of a business, to ensure that the new benefits the plan provides are somewhat equivalent to those a participant would have earned under the prior plan.

 

Trustee Directed - The plan's Trustees have the fiduciary responsibility to select the investment vehicles and invest the plan assets for all eligible plan participants.

 

Vesting - Refers to an employee's ownership of plan contributions. Employees are always 100% vested in their own contributions. Employer contributions become 100% vested after a predetermined stated period of time.

 

Wear-away period - After a cash balance plan conversion, additional benefits do not accrue to a participant until the accrued benefits payable under the cash balance formula equal the benefits accrued under the traditional defined benefit plan. A participant may have to work several years before he or she earns pension benefits above the benefits accrued at the time of the cash balance conversion. The wear-away period is the amount of time it takes for benefits to catch up, when the participant is not earning new benefits.

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This page was last updated on Saturday, January 13, 2007 10:38 AM