401k Glossary – Important 401k Retirement Savings Terminology

This 401k glossary covers terms that are deemed important for any 401k retirement saver to know. Examples of glossary terms range from categories such as 401k investments (mutual funds, bonds, stocks, asset allocation), annuity payments, rollovers, withdrawal rules and more.

12b-1 Fees

12b-1 fee represents expenses used for marketing and promotion of the fund. 12b-1 fees are generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under NASD Rules.

Sometimes 12b-1 Fee is called a management fee, although distinct from “annual management fees”.

  • 401k Plan
  • 403b Plan / Tax Sheltered Annuity (TSA)

    Accumulation Phase or Period

    Accumulation phase or accumulation period is the time in an investor’s life when he/she works hard to build up retirement savings in his investment portfolio in order to have a financially secure retirement.

    Accumulation phase can also mean the building up of annuity payments every period (monthly, quarterly, semi-annually or annually) over many years in order to have a good amount of money saved up (e.g upon retirement). After retirement or a big event in the annuity payer’s life, he can cash out by receiving monthly annuity payments from his deferred annuity plan.

    How Deferred Annuity Plans Work

    Some investors contribute a certain amount of their paycheck every month towards a deferred annuity plan thus building up compounding interest and the value of their savings. If they do this over a 20 year period for example, this is known as an accumulation period.

    The more money you contribute towards a deferred annuity plan, the more money you will have upon the annuinization phase (the phase when you start to withdraw money monthly from your plan).

    Active Participant Status

    Active participant status means the participance of an employee in a 401k retirement plan sponsored by his employer. Other retirement plans include:

    403b Plans
    – SEP IRAs (Individual Retirement Accounts)
    – Qualified Annuity Plans
    – Money Purchase Pensions
    – Defined or Targeted Benefit Plans

    Are you an active participant status in your 401k plan?

    The way to find out is by checking your Form W-2. See if the “Retirement Plan” box is checked in your form W-2 which can be obtained from your employer.

    Annual Management Fee

    Management fees are fees that are paid out of fund assets to the fund’s professional investment adviser for investment portfolio management. They are also called maintenance fees. Management fee usually range from 0.25% to 2% of assets held.

    Notice: Higher management fees do not assure superior fund performance.

    Annuity Contract

    An annuity contract is an official paper agreement between an insurance company and an investor outlining the details and covenants of the annuity plan. Some of the details and covenants could include:

    – Structure of the annuity (whether it is a fixed or variable annuity)
    – Any early withdrawal penalties or fees
    – Beneficiaries of the annuity plan upon death of current holder
    – Coverage and rights of spouse

    Annuity contracts are one of the three contracts that are offered by 403b plans. 403b Annuity Contracts are also known as “tax-deferred annuities.”

    What is the importance of an annuity contract? To make sure you have a safe and secured retirement, an annuity contract makes it mandatory for the insurance company to pay you annuity payments (based on the variable or fixed structure) every specified period (monthly, quarterly, semi-annually or annually). Upon your death, your beneficiary (spouse or your kids, family, etc) will receive the annuity payments.


    In the subject of annuities, an annuitant is an investor who receives daily (monthly, quarterly, annually) annuity payments or pension benefits. Also, an investor who contributes towards a life insurance plan in the working phase of his life can receive annuity benefits and payments upon retirement or death (death insurance). In financial terms, an annuitant is the beneficiary (person who receives the benefits) of an annuity or pension plan.

    Retired people who write wills can also designate their beneficiaries who will receive daily payments (in the form of annuities) upon their death.

    Asset Allocation

    The process of apportioning investments among various asset classes, such as stocks, bonds, commodities, real estate and cash.

    This process is usually done using the historical performance of the asset classes within sophisticated mathematical models.

    Asset allocation affects both the risk and return of investors. Some funds shift assets frequently based on analysis of business-cycle trends trying to maximize return for a given level of risk.

    Assumed Interest Rate

    Assumed Interest Rate is the prescribed interest rate selected by insurance companies to determine the value of annuity contracts and the amount of annuity payments that will be paid out to investors, upon maturity of their investments. The monthly payments provided by an annuity depend on:

    • Assumed Interest Rate
    • Spouse Coverage Covenants
    • Age of Annuitant
    • Type of Annuity Contract Chosen

    Insurance companies use the Assumed Interest Rate as a minimum prescribed rate that must be earned on investments in order to cover their overhead costs as well as make a decent profit.

    Automatic Enrollment / Passive 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. Employees who do not want to make deferrals to the plan must 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.

    All passively enrolled employees must be immediately notified of their new 401k participant status.

    Back-End Load / Deferred Sales Charge / Exit charge

    Back-End Load is a fee paid when shares are sold. This fee typically goes to the brokers that sell the fund’s shares. The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough.

    Typically starts out at 6% for the first year and gets smaller each year until it reaches zero in six or seven years.

    Also called a Deferred Load, Deferred Sales Charge, CDSC (contingent deferred sales charge) or Exit Charge.


    A beneficiary is a person who will inherit the annuity payments or the wealth of a dead person based on his will or financial covenant. Other items that can be distributed to a beneficiary include property, bank account balances, 401k savings and more.

    This beneficiary can be a:

    – spouse of the dead
    – child of the dead
    – charitable organization
    – friend, etc

    The person who is giving out his wealth is known as the benefactor.

    Examples of BeneficiariesBeneficiary of a Life Insurance Policy = Person who receives the annuity payments from the dead person’s will after his death

    Beneficiary of a Trust = Person with equitable ownership of the trust’s assets (also known as the trustee).

    Benefit Offset

    Benefit offset is when a 401k retiree does not have receive the full benefits and payments from his 401k retirement plan because he owes money to the plan. This is a typical case when a retiree borrows a 401k loan and is not able to repay it back.

    The US Social Security Act allows 401k administrators to withhold 10% of a retiree’s 401k savings in order to settle any unpaid balances.


    The beta number describes how the expected return of a stock or portfolio is correlated to the return of the financial market as a whole.

    Beta shows the magnitude of a portfolio’s past share-price fluctuations in relation to the ups and downs of the overall market.

    An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market.

    The market has a beta of 1.00, so a portfolio with a beta of 1.50 would have seen its share price rise or fall by 15% when the overall market rose or fell by 15%.

  • Blackout Period

    Capital Growth Strategy

    Capital growth strategy is the efforts made to maximize the value of capital assets so that they appreciate (go up) in value and can be sold for a profit. These efforts are made over the long term.

    A typical High Returns and Low-Medium Risk Capital Growth Portfolio looks like this:

    Capital Growth Portfolios
    60% -70% Equity Investments
    20% -30% Stable Fixed Income Securities
    0% – 5% Money Market Securities

    On the other hand, a high risk capital growth portfolio would consist mostly of 100% equity investments that could generate huge positive returns over the long term, or plunge in value (great risk).

    Capital Gains Treatment

    Capital gains treatment refers to the taxation applicable to profits made from selling investments such as securities, bonds, etc. For example, if you purchase a stock for $400 and sell it 6 months later for $420, you have an investment capital gain of $420 – $400 = $20. Capital Gains Treatment refers to how this $20 is taxed.

    Short Term Capital Gains

    Stocks and securities that are held for LESS than 1 year are known as short term investments and are assessed a tax rate of a maximum of 35% (depending on the investor’s personal tax bracket).

    Long Term Capital Gains

    Stocks and securities that are held for MORE than 1 year are known as long term investments and are assessed a tax rate of a maximum of 15% (depending on the investor’s personal tax bracket).

    You might notice that the difference between long term capital gains tax rate of 15% is way way lower than the short term capital gains tax rate of 35%. That’s a difference of 20%! Therefore, if you are a short term trader, know that you will be paying a maximum of 35% taxes while if you hold on to your stocks for more than a year, your tax bracket can be reduced by a whopping 20%!

    Cash Balance Pension Plan

    Cash Balance Pension Plan is a Defined Benefit Plan account which is credited by a Participant’s Employer by depositing a set percentage of the employee’s wage + Interest Charges into the account. Since a Cash Balance Pension Plan is a defined benefit plan, the profits and losses made in the portfolio of investments chosen is beared solely by the employer. The plan’s funding limits, funding requirements and types of investments and their levels of risk is chosen by the employer.

    Defined Benefit Plan?

    Defined Benefit Pension Plans are the traditional pension plans where both you and your employer withhold a certain amount of your gross wage, manage it until retirement and this guarantees you a specified monthly income for life, upon your official retirement. The total monthly payment you will receive depends on how long you have worked, and how big your pension nest egg is… (Read Full)

    Central Provident Fund

    Central Provident Fund (CPF) was introduced by the Singaporean Government to encourage the people of Singapore to save for their retirement and reduce the burden on the Pension System. Introduced in 1948 by the Progressive Party, the Central Provident Fund was meant to provide some sort of financial security for retirees living in Singapore.

    The percentage of contributions from Gross Wage depends on the age of the individual. For example, individuals less than the age of 35 must contribute 33% of their Gross Wages towards the Central Provident Fund (CPF). This 33% is made up of Employee Contributions of 20% and Employer Matching Contributions of 13%

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    Conduit IRA

    Conduit IRA is a traditional IRA account that holds only those assets that were distributed from a qualified retirement plan. When employees change jobs, they usually store their assets in a conduit IRA until their assets can be rolled over to their new employers. Go here to learn more about 401k Rollovers.

    If any other retirement assets are amalgamated with the assets in a Conduit IRA, the IRA will lose its conduit status and the assets will therefore NOT be eligible for favourable capital gains tax treatments.


    A Conveyance is a written agreement that transfers some ownership of a real tangible/intangible property from one party/individual to another. This Conveyance is usually in the form of a Lease or Deed Agreement.
    Note: A Conveyance tax is charged on the transfer of real property from one person to another.

    Corporate Pension Plan

    A Corporate Pension Plan is a formal paper agreement between a corporation and its employees outlining the details of the retirement plans available for all the employees. It states the amount of funding that both the employees and the employer will contribute towards the 401k Retirement Plans. Some employees may choose to go with the 403b plan if they are eligible. In the past, employers used to solely contribute towards the 401k retirement plans based on the performance of employees, length of employment and type of position held.

    There are usually 2 types of Corporate Pension Plans:

    1) Defined Benefit Plans

    The amount of funding towards a 401k retirement plan is calculate based on a pre-set formula which is set on things like length of employment and gross wage. With Defined Benefit Plans, it is the employer who funds the retirement plans and therefore his responsibility to have sufficient cash to do so.

    2) Defined Contribution Plans

    Defined contribution plans are based on the investment returns that are made on 401k retirement plans. Therefore, there is no guarantee that employees will receive a certain payment upon retirement.

    In the last couple of decades, corporations have been moving from Defined Benefit Plans (where it is their responsibility to come up with the cash) to Defined Contribution Plans (where it is not their responsibility).

    Deferred Annuity

    A Deferred Annuity is an annuity contract that delays the payment of annuities (cash distributions) until the investor wants to receive it. The payment of these annuities can be periodic (example monthly, quarterly, semi-annually or annually) or a lump-sum cash distribution. Deferred Annuity Plans have 2 phases:

    1) Phase 1 – Savings Phase

    In the savings phase, the investor contributes periodic payments or contributions that accumulate interest and grow with the powerful effects of compound interest.

    2) Phase 2 – Income Distribution Phase

    This is when after contributing towards the Deferred Annuity plan for years, the investor retires and wants his money back (in the form of periodic payments or a lump sum cash distribution).

    The advantages of a Deferred Annuity plan include tax-free growth. All the contributions you make towards a Deferred Annuity plan are tax-free up until you start withdrawing from the plan.

    Many investors choose to allow their beneficiaries to cash in their Deferred Annuity plans upon their death.

  • Defined Benefit Plan
  • Direct Rollover

    Early Withdrawal Penalty

    A 10% penalty tax for withdrawal of assets from a qualified retirement plan prior to age 59 1/2, death, disability, or retirement. This 10% penalty tax is in addition to regular federal and (if applicable) state tax.

    Expense Ratio

    Expense Ratio – Total Annual Fund Operating Expenses – Total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund’s total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions.

    Expense ratios are important to consider when choosing a fund, as they can significantly affect returns.


    A person with the authority to make decisions regarding a plan’s assets or important administrative matters. Fiduciaries are required under ERISA to make decisions based solely on the best interests of plan participants.

    Form 5500 – Annual Report

    Each year, pension and welfare benefit plans are required to file an annual return/report regarding their financial condition, investments, and operations. This is done by filing the Form 5500 Annual Return/Report.

    Front-End Load / Sales Charge

    Front-End Load (also know as a sales charge) is a fee paid when shares are purchased. This fee typically goes to the brokers that sell the fund’s shares. Front-end loads reduce the amount of your investment.

    According to NASD rules, a front-end load cannot be higher than 8.5% of your investment.

    Individual Retirement Account (IRA)

    Contributions to a traditional IRA are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.

    Keogh Plan

    Retirement plan, named for U.S. Representative Eugene James Keogh, is designed for self-employed individuals.

    The maximum annual deductible amount is the lesser of 20% of gross self-employment income or $54,000 (in 2017), where 20% of gross self-employment income is a shortcut to the long-form method of calculating 25% net Keogh earnings, as stated in the code.

    Mutual Fund

    A mutual fund is a professionally managed type of collective investment scheme managed by an investment company. Mutual fund pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.


    The combined holdings of investments held by institutions or a private individual.

    Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk can be reduced. The assets in the portfolio could include stocks, bonds, options, real estate, futures contracts, commodities, or any other item that is expected to retain its value.


    A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. Prospectus usually explains the overall investment goals, how the fund manager expects to meet those goals, any management fees charged to investors, the investment’s historical returns and projections for the future.

    In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.


    An employee’s 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 tax liability. An IRA rollover is a common choice for employees leaving a company.

    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 401(k)

    Wrap Fee

    A fee for an investment program that bundles or “wraps” together a number of services such as brokerage, consulting, advisory, research, and management services and covers them with a single fee. Typically the wrap fee is certain percentage of the value of 401k assets being managed.

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