Glossary

401(k) Plan – In this type of defined contribution plan, employees can make contributions through pre-tax deductions from their paychecks. Contributions go into a 401(k) account, and employees typically choose investments based on the options offered by the plan. In some plans, employers also match employee contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have additional employer contribution and vesting requirements.

Automatic Enrollment – Employers can automatically enroll employees in a plan, such as a 401(k) or SIMPLE IRA , and have contributions deducted from the employee’s paycheck invest in certain predetermined investments unless the employee decides otherwise. Participants can choose not to participate and can periodically change their investments (or, in the case of a SIMPLE IRA , change the financial institution where contributions are placed).

Benefit Accrual – The amount of benefits accumulated under a plan.

Cash Balance Plan – This is a defined benefit plan that has some elements similar to defined contribution plans because the benefit amount is calculated using a formula that includes deposited contributions and earnings, and each participant has a hypothetical account. Cash Balance Plans are more likely to make lump sum distributions than traditional defined benefit plans.

Defined Benefit Plan – Also known as a traditional pension plan, this type of plan promises participants a specified monthly benefit upon retirement. This benefit is usually based on factors such as your salary, age, and the number of years you have worked for the company.

Defined Contribution Plan – In a defined contribution plan, employees and/or employers contribute to the employees’ individual plan accounts. Employees typically decide how to invest their accounts. The account value will change based on the value and performance of the investments. The amount in the account at the time of distribution includes contributions and investment gains or losses, less any investment and management fees. Contributions and earnings are not taxed until they are distributed.

Employee Retirement Income Security Act of 1974 ( ERISA ) – is a federal law that sets standards for the protection of individuals in most voluntarily established private sector retirement plans. The law:

• Requires plans to provide participants with plan information, including material factual information about plan characteristics and funding;
• Setting minimum standards for participation, vesting, benefit accrual and funding;
• Imposing fiduciary duties on those who manage and control plan assets;
• Require plans to establish an application and appeal process for participants to receive benefits from their plans;
• Giving participants the right to sue for benefits and breach of fiduciary duties; and,
• If a defined benefit plan is terminated, certain benefits are guaranteed to be paid through a federally chartered corporation, the Pension Benefit Guaranty Corporation ( PBGC ).

Employee Stock Ownership Plan ( ESOP ) – is a defined contribution plan that invests primarily in the employer’s company stock.

Individual Benefit Statement – An individual benefit statement provides periodic information about a participant’s retirement benefits, such as total plan benefits received and vested benefits earned. Depending on the type of plan, it may also include additional information, such as what investments have been made in the participant’s 401(k) plan account and the value of those investments.

Individual Retirement Account ( IRA ) – is an individual account opened at a financial institution such as a bank or mutual fund company. Under federal law, individuals can deposit a certain amount of personal savings into it, and if the investment grows, the tax payable can be deferred. In addition, participants in defined contribution plans can transfer funds from their employer’s retirement plan to an IRA when they leave their job . An IRA can be part of an employer’s plan.

Money Purchase Plan – A money purchase plan requires the employer to make a predetermined contribution to an individual’s account each year and is subject to other rules.

Multiemployer Plan – A retirement plan sponsored by more than one employer under a collective bargaining agreement that meets certain other requirements. If a participant leaves one sponsoring employer and joins another sponsoring employer, he or she remains in the same plan .

Plan Administrator – The person identified in the plan documents as being responsible for the operation of the plan, who may be the employer, a committee of employees, a corporate executive, or an individual hired for that purpose.

Plan Document – A written document for developing and implementing a plan.

Plan Fiduciary – Any person who exercises discretion or exerts discretionary control over the administration of a plan, exercises any power or exerts control over the management or disposition of plan assets, or provides investment advice on plan assets for a fee or other compensation.

Plan Trustee – A person who has exclusive power and discretion to manage and control the plan assets. The trustee may take instructions from a designated trustee who may appoint one or more investment managers for the plan’s assets.

Plan Year – The 12 – month period specified in a retirement plan for the purpose of calculating vesting and distributions, etc. The plan year can be a calendar year or other period, such as July 1 to June 30 of the following year.

Profit Sharing Plan – A profit sharing plan allows the employer to determine how much to contribute to the plan each year (from profits or other sources) in the form of cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants.

Rollover – When a participant leaves a job, they can instruct a defined contribution plan to transfer the funds in their account to a new plan or individual retirement account. This is called a rollover. Doing so preserves their benefits and, if done in a timely manner, does not incur any tax consequences.

Safe Harbor 401(k ) – A Safe Harbor 401( k) is similar to a traditional 401(k) , but the employer is required to contribute to the plan for each employee. Employer contributions to a Safe Harbor 401(k) are immediately 100% vested. Safe Harbor 401(k) eliminates some of the complex tax rules that typically apply to traditional 401(k) plans, reducing the day-to-day administrative burden on employers.

Savings Incentive Match Plan for Employees of Small Employers ( SIMPLE ) – A plan in which small businesses with 100 or fewer employees can provide retirement benefits (similar to a 401(k) plan) through payroll deductions and matching contributions. This plan can be either a SIMPLE IRA or a SIMPLE 401(k) . SIMPLE IRAs place less of a burden on employers to manage day-to-day, as employees own the IRA and most of the paperwork is done by the bank or financial institution that receives the funds. While the two plans have different features, such as contribution limits and whether borrowing is available, employer contributions are 100% vested immediately in both plans.

Simplified Employee Pension ( SEP ) – A plan in which an employer contributes to an individual retirement account ( IRA ) owned by an employee on a tax-advantaged basis . If certain conditions are met, the employer does not have to comply with the reporting and disclosure requirements of most retirement plans. In a SEP , the IRA is established by or for employees to receive employer contributions.

Summary Plan Description – a document provided by the plan administrator that lists a plain-language description of the important features of the plan, such as:

• when the employee began participating in the plan,
• how services and benefits are calculated,
• When benefits vest,
• When and how payment is received, and
• How to make a claim for benefits.

Participants must be notified of material changes through a revised Summary Plan Description or a separate Summary of Material Modifications document.

Vested Benefits – Benefits to which a person is already entitled and which cannot be forfeited.

Years of Service – The amount of time a person has worked in a job covered by a plan. Used to determine when they can participate, determine vesting, and how benefits accrue under the plan.