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Glossary of Financial Terms

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401(k) Plan – Plan whereby employees may elect, as an alternative to receiving taxable cash in the form of compensation or a bonus, to contribute pretax dollars to a qualified tax-deferred retirement plan. 401(k) is the name of the Internal Revenue Code for which the rules of the plan appear.

402(g) Limit – This is the limit on elective employee deferrals that can be contributed to either a 401k or 403b retirement plan. The limit can change each year, so check for current rules.

403(b) Plan – A qualified retirement plan, also known as a Tax Sheltered Annuity (TSA) and similar to a 401(k), but offered to employees of non-profit organizations.

457 Plan – A non-qualified, deferred-compensation retirement plan designed for use by public sector employees.


Actual Contribution Percentage (ACP) – Ratio of a participant’s matching and after-tax contributions to the participant’s compensation.

Actual Deferral Percentage (ADP) – Ratio of a participant’s elective deferrals to the participant’s compensation.

Asset Allocation – Apportioning of investment funds among categories of assets, such as cash equivalents, stocks, and fixed-income.


Baby Boomer – A reference to the large generation of individuals born between 1946 and 1964, the first of who were conceived immediately after World War II as soldiers returned home.

Back-end Load – A redemption charge that is paid at the time of cancellation of a financial product such as mutual fund or annuity.

Beneficiary – Individual or entity entitled to the distribution of an account owner’s assets when that account owner is deceased.

Bond – A loan to a corporation by an investor in exchange for a predetermined rate of interest. The bondholder will receive their original investment (principal) back from the corporation at a set point in the future.


Catch-up Contributions – Rule enacted from the Economic Growth and Tax Relief Reconciliation Act of 2001 allowing workers aged 50 and older to put extra money away into their employer-sponsored plans and IRA’s.

Certificate of Deposit – a written acknowledgment from a bank that it has received from the person named a specified sum of money as a deposit, often for a fixed term at a specified interest rate.

Cliff Vesting Schedule – The attainment of 100% vesting over employer contributions in an employer-sponsored retirement plan immediately following two years of no vesting.

Commercial Paper – A very short-term debt obligation (usually no more than a few months) issued by a corporation to finance its accounts receivables and inventory.


Default (401k loan) – The failure to repay a 401(k) loan as required by the plan document resulting in a deemed distribution in which taxes are owed on the defaulted amount.

Defined Benefit Plan – Plan that promises to pay a specified amount to each person who retires after a set number of years of service. Such plans pay no taxes on their investments. Employees contribute to them in some cases; in others, all contributions are made by the employer.

Defined Contribution Plan – Type of retirement plan in which the level of contributions is fixed. The value of your retirement account depends on amount of contributions made and investment returns earned. Examples of a defined contribution plan are 401(k)’s, 403(b)’s, and 457(b)’s.

Direct Rollover – The movement of retirement assets from one investment account directly to another, without assuming ownership of assets, thus preventing a taxable event.


Employee Deferral – Voluntary withholding from an employee’s paycheck at a designated rate that is deposited into an employer-sponsored retirement plan. 

Employee Retirement Income Security Act (ERISA) – Landmark 1974 pension reform that created enforceable laws governing the handling of defined benefit and defined contribution retirement plans. Also created the Pension Benefit Guaranty Corporation.

Employee Stock Ownership Plan (ESOP) – A defined contribution plan (one type of stock bonus plan) that encourages employees to invest in the company’s stock on a tax-deferred basis.

Employer Match – A contribution made to an employee’s retirement account by the employer at a rate directly proportional to the employee’s contribution.

Employer-Sponsored Plan – A retirement plan established by a company intended to operate as a benefit to its employees.

Expanded Hardship – Hardship withdrawals that can be extended to the designated beneficiaries of a defined contribution retirement plan participant. Employers are not required to offer them, however.


Front-end Load – A sales charge that is paid at the time of initial purchase of a financial product such as mutual fund or annuity.


Graded Vesting Schedule – A gradual, incremental increase in ownership of employer contributions in an employer-sponsored retirement plan.

Growth Fund – Mutual fund that invests primarily in growth stocks. Aims for steady long-term growth for its investors.

Growth Stock – Stock of a corporation that has exhibited faster-than-average growth compared to similar stocks of its kind. Growth stocks tend to have a higher risk level associated with them due to their high price-earnings ratios.


Highly Compensated Employee (HCE) – An employee that made $105,000 or more in 2007 for purposes of non-discrimination testing for a company retirement plan in 2008.


Index Funds – Also known as inactively managed funds. Mutual fund that attempts to match the performance of well-known market indices by investing in the same stocks or bonds those indices track. One of the more commonly known market indices is the S and P 500 Index. Index funds are also less expensive to manage than actively managed funds, so they have a built-in cost advantage.

Indirect Rollover – The depositing of retirement funds into a retirement vehicle after having already taken ownership of the assets from a previous account first.

Inflation – A rise in the overall cost of goods and services ultimately decreasing the value of local currency.

IRA (Individual Retirement Account) – Personal, tax-deferred retirement account, that can be established by any individual with earned income.


Money Market – Virtual monetary exchange which allows large institutions such as corporations and governments to facilitate their short-term cash needs.

Mutual Fund – Vehicle which invests in a pool or stocks, bonds, or cash equivalents purchased using the money given to the fund by investors. Mutual funds have the advantage over individual stocks or bonds through diversification and professional management.


NASDAQ – National Association of Securities Dealers Automated Quotations owned and operated by the National Association of Securities Dealers is an electronic stock information system that provides broker/dealers with up-to-the-minute price quotations on securities. The NASDAQ has a heavy concentration of technology stocks which trade on the platform.

Nest Egg – A term used to describe all assets saved and/or invested to provide for income during one’s retirement.

Net Asset Value (NAV) – Share price or market value of a mutual fund. Excepting Exchange Traded Funds (ETF’s), mutual funds’ NAV’s are calculated each day after the stock market closes. The fund takes its total assets, minus all its liabilities, divided by the number of outstanding shares to reach the NAV.

Non-Discrimination Testing (NDT) – An annual testing process an employer must put its qualified retirement plan through to ensure that the plan does not discriminate in favor of its highly compensated employees.

Non Highly Compensated Employee (NHCE) – An employee that made $104,999.99 or less in 2007 for purposes of non-discrimination testing for a company retirement plan in 2008.


Participant – An eligible employee who is enrolled in an employer-sponsored retirement plan.

Pension Plan – A retirement plan sponsored by an employer or union that is designed to replace a retirees’ income in retirement. 

Profit Sharing Plan – An agreement between a company and its employees that allow the employee to share in the company’s profits. Contributions are made by the employer to a separate account held for benefit of the employee usually on an annual basis. FUnds in a profit sharing plan grow tax-deferred until the employee terminates employment and withdraws the money.


Qualified Domestic Relations Order (QDRO) – A QDRO is a court document included in a divorce agreement that grants an ex-spouse legal rights to a portion of the retirement assets held in the name of the distributing spouse.

Qualified Plan – Tax-deferred retirement vehicle set up by an employer for the benefit of its employees. It allows for employer contributions, and in some cases, employee contributions. See also 401k Plans.


Required Minimum Distribution (RMD) – The minimum amount that must be distributed from a retirement account at age 70 1/2. Minimum amount is determined based on life expectancy and the balance of the account on December 31st of the prior year.

Rule of 72 – Formula which approximates how long it will take a certain amount of money to double at a certain interest rate. Simply divide 72 by the interest rate. For example, money invested that will provide an average annual return of 8% will double every 9 years (72/8).


Stock – Represents ownership in a corporation. A stockholder has rights to the corporation’s earnings and assets.


Treasury Bill (T-Bill) – A short-term debt obligation, with a maturity range of less than one year, issued by a federal, state, or local government to raise capital for public projects.


Vesting – The portion of ownership you attain over employer contributions in an employer sponsored plan.

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