of 401k-related terms
The maximum charge deducted from fund assets to pay for distribution and marketing costs. Charged to investors. Usually assessed as a percentage of assets held, although sometimes as a flat amount; methodology is listed in the fund's prospectus. Sometimes called a management fee, although distinct from annual management fees.
Annual Management Fee
Annual fee charged by the mutual fund company to investor to, in part, pay the professional fund manager of the investment. Usually range from 0.25% to 1.5% of assets held. Deducted automatically from investors' accounts. Higher management fees do not assure superior fund performance.
Asset Allocation Fund
Income and capital appreciation are dual goals for funds with this objective. Managers often use a flexible combination of stocks, bonds and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends.
(see Passive Enrollment, below)
The sales charges assessed when the investor removes money from the investment. Generally declines with the time the investors own the shares. Usually starts out at 6% for the first year and gets smaller each year thereafter until it reaches zero (usually in the sixth or seventh year of owning the investment). Also called a deferred load, deferred sales charge or exit charge. Back-end loads are used primarily to pay a commission to the broker/dealer who sold the fund to the investor. Often coupled with 12b-1 fees.
Seek both income and capital appreciation by investing in a generally fixed combination of stocks and bonds. These funds generally hold a minimum of 25% of their assets in fixed-income securities at all times.
A historical measure of the magnitude of a portfolio's past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%.
Mutual funds that have higher risks than money market funds but seek to pay higher yields. Not restricted to high-quality or short-term investments (as are Money Market Funds). Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards. Long-term bond funds invest in bonds with longer maturities (a longer length of time until final payout). The values of long-term bonds can go up and down more rapidly than those of shorter-term bond funds.
An investment professional licensed by the National Association of Securities Dealers to act as the liaison between buyers and sellers of securities.
A 401k investment-administration-plan package sold as one unit. In contrast to a basic 401k plan, in which the employer can individually hire the investment provider and administration provider as he or she chooses. In most bundled plans, no variation from the standard is allowed; in others, such as 401(k) Easy, there's immense investment selection as well as many variable features you choose among to customize your 401k plan to the needs of your company and its employees.
Class A Fund
Mutual fund investments that generally charge a front-end load, the size of which usually runs inverse to the amount of money being invested.
Class B Fund
Mutual investments that generally charge a back-end load that declines with the amount of time the person holds the investment fund.
Class C Fund
Mutual fund investments that generally function similarly to Class B shares, but with a back-end load that's typically lower. Class C management fees, however, are typically higher than those for Class B or Class A shares.
RS-mandated tests that compare contribution levels and actual amounts made by different classifications of plan participants. The most common tests 401k plans must pass each year as of 2002 are the ADP Test (Actual Deferral Percentage), ACP Test (Actual Contribution Percentage), and Top-heavy Test. For more infor,ation, see our 401k Basics page.
Corporate Bond Fund - General
Seeks income by investing in fixed-income securities, primarily investment-grade corporate bonds.
Corporate Bond Fund - High-yield
Seeks income by generally investing 65% or more of assets in bonds rated below BBB. The price of these issues is generally affected more by the condition of the issuing company (similar to stock) than by the interest rate fluctuation that usually causes bond prices to move up and down.
A purchase or liquidation fee that goes down either in conjunction with the amount of time the person has held the mutual fund shares or with the amount of shares the person owns.
See Back-end Load.
See Compliance Tests.
Emerging Growth Fund
Seeks rapid growth of capital and that may invest in emerging market growth companies without specifying a market capitalization range. They often invest in small or emerging growth companies and are more likely than other funds to invest in IPS's or in companies with high price/earnings and price/book ratios. They may use such investment techniques as heavy sector concentrations, leveraging and short-selling.
Equity Income Fund
Funds expected to pursue current income by investing at least 65% of their assets in dividend-paying equity securities.
Employee Retirement Income Security Act of 1974, legislation designed to protect the rights of the plan participants and beneficiaries.
See Back-end Load.
The annual fee charged to mutual fund shareholders (usually as a percentage of total investment) for the administration, operation and management expenses associated with a particular fund. May include management fees, 12b-1 fees and other fees, but does not include sales charges. Shows the actual amount that a fund takes out of its assets each year to cover its expenses.
The person who provides investment advice to a company's qualified retirement plan for a fee, and/or has discretionary control or authority over the administration of the plan, and/or has authority or control over the assets of the plan.
Foreign Stock Fund
Funds that invest primarily in equity securities of issuers located outside of the United States.
The Form 5500 is required by the IRS and Department of Labor annually. The 5500 provides statistical information about the plan and plan sponsors, reports financial information about the plan, and demonstrates compliance with 401k rules.
A fee assessed at the purchase of mutual fund shares, usually as a percentage of the purchase dollar amount. By law cannot be higher than 8.5% of the amount being invested. Front-end loads go to pay a commission to the broker who sold the fund, in theory in exchange for the broker giving the investor professional advice.
In the context of this website, a full-service plan is any 401k plan in which you pay people outside of your company to provide the plan's administration, investments and other services. One or more companies may take care of these duties, depending on the plan and its provider.
A company that offers mutual funds. Generally, the company name is included in the official fund name.
The person(s) whose job it is to "manage" the investment by buying and selling securities with the goal of having the investment meet the growth and other Objectives stated in the prospectus within the constraints (conservative growth, moderate growth, etc.) also stated in the prospectus; investors are credited with profits/losses from these transactions in proportion to the number of shares they own.
Government Bond Fund - General
Offerings that pursue income by investing in a combination of mortgage-backed securities, treasuries and agency securities.
Funds that pursue appreciation by investing primarily in equity securities. Current income, if considered at all, is a secondary concern.
Growth and Income Fund
Growth of capital and current income are near-equal objectives for these funds. Investments are typically selected for both appreciation potential and dividend-paying ability.
Highly-compensated employees are defined by the IRS as persons who own 5% or more of the company and/or earn more than $170,000 annually, and/or earn more than $85,000 (to be adjusted in 2002) in the prior year and are in the top 20% of the company, ranked by pay.
Hypothetical portfolio (common examples are; Dow Jones Industrials, and S&P 500) The performance of which is often used as a benchmark in judging the relative performance of securities such as mutual funds, stocks, and variable annuity sub-accounts. Indexes are unmanaged portfolios and should only be compared with securities or mutual funds with similar investment characteristics and criteria.
Load (Load Fund)
Mutual fund investments that charge either a front-end (purchase) or back-end (liquidation) fee on shares.
See Annual Management Fee.
Money Market Fund
A relatively low-risk mutual fund (when compared with others) managed to maintain a stable $1 share price/NAV. Investments in these funds are neither insured not guaranteed by the U.S. government, and there can be no assurance that a fund will be able to maintain a stable net asset value of $1 per share.
A collection of money invested in a group of assets and managed by an investment company (a mutual fund company or other). The money comes from investors who want to buy shares in the fund. The benefits to investors in buying shares of mutual funds come primarily from diversification, professional money management, and capital gains and dividend reinvestment.
Mutual Fund Company
A company that brings together money from many people and invests the money in stocks, bonds or other securities. The combined holdings of the stocks, bonds and other securities and assets the fund owns are known as its portfolio. Each investor owns shares of the portfolio; each shares represents a percentage ownership in the portfolio holdings.
Acronym for National Association of Securities Dealers. The securities industry's largest self-regulatory organization. For more information, visit any of the NASD websites, especially www.investor.NASD.com or www.nasd.com.
Net Asset Value (NAV)
The per share market value (price) of a mutual fund; in general, the price offered to purchase one share of the mutual fund. The NAV in most cases is calculated b including the closing day's prices of all securities held in a particular fund, plus all other assets owned by the fund (including cash), subtracting all liabilities of the fund, and then dividing the sum by all the outstanding shares of the fund on that given day. If the fund is a no-load fund, then the offering per share price for the fund and the NAV per share will be the same.
See Passive Enrollment.
No Load Fund
Mutual fund investments that do not charge front-end (purchase) or back-end (liquidation) fees; load mutual funds do, however, involve annual management fees.
Passive Enrollment (a.k.a., Automatic Enrollment or Negative Elections)
When employees are automatically enrolled in the 401k plan as soon as they meet the plan's eligibility standards. Default investments (usually a money market fund) and a default contribution rate (usually 3% to 5% of the person's compensation) are preset by the employer. All passively enrolled employees must be immediately notified of their new 401k participant status, and they must be given the opportunity to change from the default contribution rate and/or investment selection (and, of course, given the opportunity to withdraw from the plan entirely). The small amount of money that was placed in the 401k for a new employee who cancels participation soon after automatic enrollment must stay in the plan until the person's employment is terminated.
The person (typically the employer) who is responsible for adopting the plan and sponsoring it for the benefit of the employees..
Companies that sell 401k plans that are pre-packaged or bundled.
The combined holdings of stocks, bonds or other securities and assets a mutual fund company owns. Also, the combination of stocks, bonds and other securities and assets an individual person owns.
A printed document for investors that describes a particular mutual fund investment; needs to explain 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.
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.
Measures the performance of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $421 million; the median market capitalization was approximately $452 million. The largest company in the index had an approximate market capitalization of $1.0 billion. The stocks represented by this index involve investment risk which may include the loss of principal.
A market capitalization weighted price index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and Over-The-Counter market. The value of the index varies with the aggregate value of the common equity of each of the 500 companies. The stocks represented by this index involve investment risks which may include the loss of principal invested.
A fee charged when new shares of a mutual fund are purchased. It is sometimes called a load, front-end load, or exit charge. Mutual funds that don't have sales charges are called no-load funds.
Acronym for Securities and Exchange Commission. An "independent, nonpartisan, quasi judicial regulatory agency with responsibility for administering federal securities laws" (from the SEC's "who we are" in its website). For more information, visit the SEC's website: www.sec.gov.
The service requirement is the minimum amount of time that an employee must work for you, before he is eligible to participate in the plan.
Short for shares of a mutual fund investment. Each investors owns a percentage of the investment, as represented by the number of shares owned in relation to the number of shares issued.
Funds that invest primarily in equity securities of issuers within a narrow industrial category. (i.e.. automotive, travel, electronics, etc.)
Stock Funds (a.k.a., Equity Funds)
Mutual funds that generally involve more risk than Money Market or Bond funds -- but they also can offer the highest returns. A Stock Fund's value (NAV) can rise and fall quickly over the short term, but historically stocks have performed better over the long term than other types of investments. Not all stock funds are the same (e.g., Growth Funds focus on stocks that may not pay a regular dividend but have the potential for large capital gains; other specialize in a particular industry, such as technology).
Summary Annual Report (SAR)
The SAR is a recap of the financial activity that occurred in the 401k during the plan year. The SAR must be distributed to each participant and beneficiary within nine months after the close of the plan year.
For sample Summary Annual Reports, including ready-to-complete PDFs, please see our 401k FedForms website.
Summary Plan Description (SPD)
The SPD is an overview of the rules and benefits of a 401k plan. The DOL requires the plan administrator provide a copy of the SAR to each employee participating in the plan.
Third-party Administrator (TPA)
A company that provides plan administration and record keeping services to a plan sponsor. The third-party administrator may also provide investments to the plan.
The letters assigned to a particular stock, option or mutual fund used to identify that particular security for trading or quoting purposes.
The portion of a participant's 401k account balance that they are entitled to under the plan's rules. Depending on the provisions of the plan, employees become "vested" over a pre-determined period of time, incrementally over a period of years.
World Bond Fund
Seek current income with capital appreciation as a secondary objectives by investing primarily in debt obligations issued throughout the world. These bonds are frequently foreign government issues.
World Stock Fund
Funds that invest primarily in equity securities of issuers located throughout the world, while maintaining a percentage of assets (normally 25% to 50%) in the United States.
A charge for an investment program that bundles or "wraps" together a number of services (such as brokerage, advisory, research, consulting, and management services) and covers them with a single fee. Typically the wrap fee is based on the value of 401k assets being managed.