Glossary of Retirement Plan Terms



Accrued Interest

The amount credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the security's price plus the accrued interest.


Actual Contribution Percentage (ACP)

In a 401k plan, this is the result of the average of ratios of combined contributions to compensation for both highly compensated and non-highly compensated employees. Each employee ratio is calculated and then averaged for the group.


Actual Deferral Percentage (ADP)

This is the proportion of a plan participant compensation that is contributed to a 401k plan as an employee elective deferral.



A contract which an insurance company agrees to make regular payments to someone for life, or for a fixed period.



Increases the value of an investment over time.


Asset Allocation

Dividing your investment portfolio among major asset categories. The most important decision made.


Asset Allocation Fund

A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks, bonds, government securities, and real estate stocks. This gives small investors more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.



A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.


Auto Enrollment

The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make deferrals to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.


Auto Escalation

A plan which automatically increases the percentage of (retirement) funds saved from salary. This type of plan generally features a default or standard contribution escalation rate.




Balance Sheet

The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.


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. Blackout periods can last up to 60 days.



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.




Cash Balance Plan

A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest. The plan provides the benefits in the form of a lump-sum distribution or annuity.


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.


Cliff Vesting

A 401k plan with "Cliff Vesting" vests 100% of employer contributions after a specified number of years of service. After three years of service, benefits must be fully vested.


Compliance Testing

Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.




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.



The increase of purchasing power due to a general decrease in the prices of goods and services.



Decrease in the value of an investment over time.


Direct Rollover

A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a "trustee to trustee" transfer. The transfer is made without any funds being sent directly to the plan participant.


Discrimination Testing

All tax qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines; every tax qualified retirement plan (like a 401k) must pass a series of numerical measurements each year. These include the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), Multiple Use Test and Top-heavy Test. Typically, doing these tests is called discrimination testing.


Distributions and withdrawals

When money is withdrawn from a 401k plan, the withdrawal is referred to as a distribution. 401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.




Employer Matching Contribution

The amount, if any, that the employer contributes to the employee's 401k account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.


Employer Discretionary Contribution

Some employers also make an additional contribution at plan-year end in the form of increased matching contributions and/or a profit sharing contribution. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis.



Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.




401k Plan

A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401k plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401k plan carries many unique advantages for both employer and employee.


403(b) Plan

SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares.



Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.


Face Value

Principal amount of a debt instrument.



An individual or an 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.


Fiscal Year

Accounting period consisting of 12 consecutive months.




Highly Compensated Employee

A Highly Compensated Employees (HCE) is an employee who received more than $125,000 ($130,000 in 2020) in compensation during the last plan year OR is a 5% owner in the company.




Individual Retirement Account (IRA)

Personal, tax-sheltered retirement account available to wage earners not covered by a company retirement plan or, if covered, meet certain income limitations.


Individual Retirement Account (IRA) Rollover

A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to "roll-over" into, or invest that sum in, an IRA. IRA funds can be "rolled-over" from one investment to another.


Income statement

Financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.


In-service Withdrawal

A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans.

  • In-service withdrawals of elective deferrals (employee salary reduction contributions) are prohibited by law prior to age 59 1/2. While allowed by law after that age, most plans do not allow it.

  • In-service withdrawals of employer contributions are allowed under some circumstances prior to age 59 1/2, but most plans prohibit it.


Investment Advisor

A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.




Keogh Plan

Tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares. (Also know as H.R. 10 Plans.)


Key Employee

Officers, directors, owners




Money Purchase Pension Plan (MPPP)

Defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.




Non-Discrimination Rules

Rules denying an employer, employee or both the benefit of tax advantages if the plan discriminates in favor of highly compensated or key employees as demonstrated by government-specified tests.


Non-Elective Contribution

A type of contribution an employer chooses to make to their employee's retirement plan account regardless of whether the employee makes a contribution to the plan.


Non-Highly Compensated Employee (NHCE)

This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.


Non-Qualified Deferred Compensation Plan

Plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer's creditors.


Non-Qualified Plan

Pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.




Participant Contributions

The dollars that employees contribute to their 401k plans.


Participant Directed Account

Plan that allows participants to select their own investment options. See Participant Directed Investing.


Participant Directed Investing

The employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.



Pension Benefit Guaranty Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.


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.


Plan Vendor

Companies that service and/or sell 401k plans. They are generally employed by the plan sponsor.


Plan Year

The calendar or fiscal year for which plan records are maintained.


Profit Sharing Plan

Defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.




Qualified Domestic Relations Order (QDRO)

Judgment, decree or order that creates or recognizes an alternate payee's (such as former spouse, child, etc.) right to receive all or a portion of a participant's retirement plan benefits.


Qualified Plan

Private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal.





An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.


Roth 401k

401k feature that allows employees to make elective contributions on an after-tax basis. Withdrawals, generally after age 59½, of any money from the account (including investment gains) are tax-free.





Summary Plan Description (SPD) for ERISA employee benefit plans. ERISA requires an SPD be distributed to each plan participant and to each beneficiary receiving benefits under the plan as follows: For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.




Target benefit

A target benefit plan is a defined contribution plan that acts much more like a defined benefit plan. Contributions are set for each year, but are variable based on the age of the employee. This allows older employees to receive similarly sized pensions as younger employees despite having less time for investments to grow.


Target-date fund

A mutual fund type that automatically reduces the risk within its portfolio by resetting the asset mix between stocks, bonds and cash to be more conservative based on the number of years to a target date.


Tax free rollover

Provision whereby an individual receiving a lump sum distribution from a qualified pension or profit sharing plan can preserve the tax deferred status of these funds by a "rollover" into an IRA or another qualified plan if rolled over within sixty days of receipt.




Unfunded Vested Pension Liability

In a defined benefit pension plan, the difference between the actuarially-determined value of the vested (non-forfeitable) benefits under the plan, and the market value of the plan's assets.


Unfunded Prior Service Pension Liability

In a defined benefit pension plan, the difference between the actuarially-determined value of the projected future benefit costs (both vested and manifested) and administrative expenses, as well as the unamortized portion of prior benefit costs, under the plan, and the market value of the plan's assets.





The process of determining the current worth of an asset.



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.







6530 N. 16th St.

Phoenix, AZ 85016-1306

Telephone: 602-944-1515




Follow Us:

  • LinkedIn App Icon
  • Wix Twitter page