The glossary below will help you familiarize yourself with the meaning behind some of the language you’ll see when wading into the world of 401(k) plans.
401(k)
A 401(k) is a retirement account to which employee and employer contribute, on which taxes are deferred until withdrawal, and for which the employee usually selects the types of investments.
403(b)
A 403(b) is a type of retirement savings plan for employees that work for a charity or non-profit and is exclusive to tax-exempt organizations.
Auto-Enrollment
Auto-enrollment allows employers to set up eligible employees with a retirement savings plan that will start after a predetermined number of days, or hours, they have worked for the company.
Beneficiary
A beneficiary is a person that you as a retirement plan participant chose to receive benefits of the plan should you die.
Blackout Period
A blackout period is an amount of time that a participant cannot access or make changes to their 401(k) plan.
Defined Contribution Plan
A defined contribution plan is an employer-sponsored retirement plan. The income the plan provides varies according to several factors including how much money is contributed to the plan, how the contributions are invested, and the amount of the return on the investment.
Direct Rollover
A direct rollover moves retirement savings assets (money) from one retirement plan directly into another.
Distribution
Distribution is when you withdraw money from your retirement savings account. There are rules around when you can withdraw your funds and penalties for withdrawing early.
Diversification
Diversification is an investment strategy that spreads your invested money (or principal) around different sectors and industries. The purpose of this is to protect the overall bulk of your money by essentially not putting all of your eggs in one basket.
Employee Deferral
An employee deferral is the amount of money selected by the participant to be contributed to their 401(k) plan.
Employer Match
An employer match is the amount an employer will contribute to an employee’s 401(k) account.
ERISA
The Employee Retirement Income Security Act (ERISA) is a law passed in 1974 that gives certain rights to participants and sets standards for 401(k) plan administrators.
Expense Ratio
An expense ratio is an annual amount you pay for maintaining a mutual fund that is a percentage of the net asset value in the fund.
Hardship Withdrawal
A hardship withdrawal is a distribution made from a participant’s retirement savings plan during a time of extreme financial need.
Highly Compensate Employee (HCE)
A highly compensated employee is a worker who:
- Owned more than 5% of the interest in a business at any time during the year or the preceding year, regardless of how much compensation that person earned or received
- Received compensation from the business of more than $130,000 if the preceding year is 2020 or 2021, and,
- If the employer so chooses, was in the top 20% of employees when ranked by compensation
In-Service Withdrawal
An in-service withdrawal is a withdrawal from a retirement savings plan from the participant but comes with various stipulations based on the kind of plan.
IRA
An Individual Retirement Account (IRA) is a personal retirement savings plan with tax incentives and limitations.
Key Employees
A key employee is an employee with major ownership and/or decision-making role in the business. Key employees are usually highly compensated either monetarily or with benefits, or both.
- More than 5% owner of the business,
- Owns more than 1% of the business, and has annual compensation greater than a certain amount or is an officer with compensation greater than a certain amount
Managed Account
A managed account is a portfolio of stocks or bonds owned and managed by the participant investor.
Multiple Employer Plan (MEP)
A multiple employer plan (MEP) is a retirement savings plan that covers two or more employers. Allowing small businesses to offer large-company benefits.
Mutual Fund
A mutual fund is a type of financial vehicle made up of collectively pooled money in the form of stocks or bonds.
Net Asset Value
Net asset value (NAV) is the current market worth of a mutual fund share.
Non-Discrimination Testing
Non-discrimination testing entails that employees who fall into a particular status (highly compensated and key employees) must maintain a certain contribution rate, as determined by the contribution rate of non-highly compensated workers (NHCEs).
Non-Elective Contributions
A contribution made by an employer regardless of whether the employee contributes. This sort of donation is not subtracted from the employee’s earnings paycheck.
Participant
A participant is an employee who is eligible for a retirement savings plan.
Plan Administrator
A 401(k) plan administrator is a person or organization your employer chooses to manage your company’s retirement savings plan. The administrator will work with your plan provider to ensure that the plan meets government regulations with the Department of Labor. Plan administrators also make sure employees have the information they need on their plans to complete activities like enrollment, applying for loans and requesting a distribution.
Plan Provider
A 401(k) plan provider is a kind of financial services company that sells your employer (or you) your retirement savings plan. Slavic401k is a plan provider.
Plan Sponsor
A 401(k) plan sponsor is the employer who offers the plan to employees. The plan sponsor will choose which type of retirement savings plan they will offer their employees and then partner with the plan provider and plan administrator.
Pooled Employer Plan (PEP)
The latest evolution in the US retirement market is a Pooled Employer Plan (PEP), which has emerged as a key provision of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in 2019. A PEP allows organizations of all sizes to combine their retirement plans into a single 401(k) plan.
Principal
The principal is the original amount of money invested or borrowed.
Qualified Automatic Contribution Arrangement (QDIA)
A Qualified Automatic Contribution Arrangement, or commonly referred to as QDIA, is a default investment option for plan contributions that will be automatically applied to a participant’s retirement plan unless other investment selections are made.
Recordkeeper
A recordkeeper is the service provider for a 401(k) plan who keeps track of the different money sources in the plan. They also provide online support and participant statements.
Rollover
Rollover is when you move your money (assets) from one qualified retirement investment account to another. Investment plans can be tax-deferred or tax-free.
Roth 401(k)
A Roth 401(k) is a feature that allows participants to make contributions to a retirement savings plan on an after-tax basis.
Single Employer Plan (SEP)
A single employer plan provides retirement benefits to the employees of only one employer.
Summary Plan Description (SPD)
A summary plan description (SPD) is the document that will describe the features of your employer-sponsored plan including participant rights as defined by The Employee Retirement Income Security Act (ERISA).
Vesting
Vesting is a period of time you must work for your employer before you can gain access to your employer-contributed retirement plan income. This period can vary and range over several years.
