Retirement Glossary
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- Accrued benefit: The amount of benefit that will be provided to a participant in a defined benefit plan when that participant reaches normal retirement age.
- Actuary: A business professional who uses mathematical formulas, statistics and risk analysis to calculate the employer's annual contributions to a defined benefit plan.
- Annual minimum contributions: The amount an employer must contribute to the retirement plan on behalf of an employee, which amount varies depending on the type of the plan.
- Annual nondiscrimination testing: Yearly tests to determine if benefits for highly compensated employees exceed established limits as compared to the benefits for nonhighly compensated employees.
- Annual return: Although retirement plans are generally not required to pay taxes, some plans must annually file Form 5500 and related Schedules to report financial and operational information.
- Benefit: The amount and method of payment a plan will pay to an employee or his or her beneficiary upon the occurrence of some event described in the plan, like retirement, disability or death.
- Benefit formula: The method (usually a mathematical equation) a plan uses to calculate the amount of benefits earned by employees.
- Catch-up contributions: Plans that allow employees to contribute to their own retirement may permit employees age 50 or older at the end of the calendar year to make additional (catch-up) contributions to plans. Amount of the catch-up contributions depend on the type of plan.
- Contribution limits: The law limits the amounts that can be contributed annually to a plan for an employee. The limits differ depending upon the type of plan and upon whether it is the employer or the employee who is contributing.
- Cover: The law requires an employer who has a retirement plan to enroll employees who meet certain requirements. The eligibility requirements vary by type of plan. An employer may use less restrictive eligibility requirements than those legally required.
- Coverage tests: The law requires certain plans to meet annual tests to ensure that plans do not disproportionately benefit the business’ owners and highly compensated employees.
- Custodial Account: A mutual fund is a type of investment that pools your money with other investors who have similar investment goals. Each fund you select is managed with a goal of achieving certain objectives —including a certain balance of risk and potential return. Your return depends on the performance of the various funds you choose.
- Design flexibility: Although certain terms for retirement plans are legally required, an employer can have other optional terms and provisions permitted for that type of plan.
- Employer contributions: Money deposited by an employer into the plan for the benefit of plan participants.
- Final average pay: A number of months or years, as specified in a defined benefit plan, used to determine an employee’s average salary, which in turn determines the amount of benefits the participant will receive.
- Hardship withdrawals: Certain plans may allow employees to withdraw money from the plan while still employed to relieve an immediate and heavy financial need of the employee, dependent or beneficiary. Amount withdrawn can't be more than necessary to satisfy the financial need.
- Highly compensated employees: An individual who owned more than 5% of the employer business at any time during the year or the preceding year or received compensation for the preceding year of more than an annually adjusted amount.
- Includible compensation: Generally, for 403(b) and 457(b) plans, this is the amount of includible income and benefits that a participant receives from the employer who maintains the retirement plan and that must be included in the participant's income.
- Loans: If permitted by the plan, amount that an employee may borrow from the plan but must repay along with stated interest.
- Matching contribution: The amount an employer deposits to the plan for a plan participant that equals some portion (usually percentage) of an employee’s contributions.
- Operate: Generally means running the plan in accordance with its written terms, filing any required returns, performing required tests and updating the plan so that it conforms to any changes in the law.
- Payroll deduction: The amount an employee chooses to have the employer deduct from his or her wages to deposit to a retirement plan.
- Pre-approved plan: The plan document, for some types of plans, sold by institutions or practitioners that has been approved in form by the IRS as meeting that plan type's basic legal requirements.
- Salary deferrals: The amount an employee can choose to have the employer deduct from his or her pay for contribution into a retirement plan that permits employee contributions. The amount an employee can defer varies by type of plan and is subject to annual limits.
- Set up: The process to establish a plan. Generally adopting a plan document (model form, pre-approved or individually drafted) and setting up an account(s) or trust to receive deposited money. 403(b) plans require written program but not a single plan document.
- Tax-Sheltered Annuity: A type of annuity that allows an employee to make contributions from his or her income into a retirement plan. The contributions are deducted from the employee's income and, as a result, the contributions and related benefits are not taxed until the employee withdraws them from the plan. Because the employer can also make direct contributions to the plan, the employee gains the benefit of having additional tax-free funds accruing.
- Vesting: The portion of retirement benefits owned by the employee and no longer at risk of being forfeited. Plan must state the yearly percetnage the employee is vested in his or her retirement benefits. Employee contributions must be immediately vested.
- Volatility: A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
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