403(b) Glossary

A 403(b) is a tax deferred retirement savings plan available for public education organizations, some tax-exempt organizations, and self employed ministers in the United States.

Similar to the more popular Roth IRA, a Roth 403(b) allows participants to contribute after tax dollars that will grow tax deferred. The money can then be withdrawn tax free. A participant may contribute to both a 403(b) and Roth 403(b) with the regular yearly contribution limits still applying. 

Similar to the more traditional 403(b), a 457(b) plan has three major differences. 1.) Money can be withdrawn upon separation of service with no 59 1/2 age minimum applying. 2.) While a 403(b) has two catch up provisions that can both be exercised simultaneously each year, with a 457(b) only one of the two can be used each year. 3.) Typically rules for hardship withdrawal are stricter than a 403(b) plan. 

Asset allocation

Dividing your investment portfolio among the major asset categories. The most important decision you will make.

Blackout Period

When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts.

Bond

A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Catch-up Provision

A provision found in some 401k plans that allows an eligible employee who are at least age 50 to make higher annual contributions in the years prior to retirement.

Collective Trust Fund

Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.

Common Stock

An investment representing ownership interest in a corporation.

Compounding

The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

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.

Defined benefit

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

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.

Diversification

The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.

Dollar-Cost Averaging

A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.

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.

Fiduciary

An individual or a 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.

Index Fund

A common trust fund or mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard & Poor's 500-stock index.

Inflation

The loss of purchasing power due to a general rise in the prices of goods and services.

Market risk

The volatility of a stock price relative to the overall market or index as indicated by beta.

Money Market Fund

A fund that seeks to maintain a stable net asset value of $1 per share. Money market funds are generally considered to be conservative; however they are not guaranteed by the U.S. government and can lose value.

Mutual Fund

A pool of investments managed by a fund management company. Mutual funds, are also called "open-end" investment companies and they can be divided into three broad categories: stock funds, bond funds, and money market funds.

Plan Administrator

The individual, group or corporation named in the plan document as responsible for day to day operations. 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.

Qualified Plan

Refers to a retirement plan (such as a 401(k), 403(b), or 457) that qualifies for special tax treatment from the IRS.

Risk Tolerance

The extent to which an investor will accept risk in the pursuit of a financial reward. The greater an investor's tolerance, the more risk s/he will accept in order to reach their goal.

Rollover

A transfer from one qualified tax-deferred pension plan (such as a 401k plan) into another (such as a new employer's 401k plan) that does not expose the money to early withdrawal penalties nor income taxation. An IRA rollover is a common choice for employees leaving a company: the money goes from the former employer's 401k into an Individual Retirement Account (IRA), where it continues to grow and compound tax-free.

Vesting

The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401k plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.