401(k) Plan

A 401(k) plan is a type of employer-sponsored retirement savings plan in the United States. It allows employees to save and invest a portion of their paychecks before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account. Here are the key features of a... Read more

404(c) Compliance

Section 404(c) of the Employee Retirement Income Security Act (ERISA) provides a specific framework within the 401(k) industry for participant-directed individual account plans, such as 401(k) plans. This framework allows participants to exercise control over the investments in their accounts. Here’s a breakdown of what 404(c) compliance entails: Participant Control:... Read more

Annual Contribution Limit

The Annual Contribution Limit for 401(k) and IRA (Individual Retirement Account) plans refers to the maximum amount of money that an individual is allowed to contribute to their retirement accounts each year. The Internal Revenue Service (IRS) sets these limits, and they are subject to change annually based on inflation... Read more

Asset Allocation

In the context of 401(k) and IRA accounts, asset allocation refers to the strategy of dividing your investment portfolio among different asset classes, such as stocks, bonds, and cash equivalents. The purpose of asset allocation is to balance risk and reward according to your investment goals, time horizon, and risk... Read more

Automatic Enrollment

Automatic enrollment is a feature used in some 401(k) retirement plans that allows employers to automatically sign up their employees for the 401(k) plan, rather than waiting for the employees to sign up themselves. When this feature is in place, a pre-determined percentage of the employee's paycheck is automatically deducted... Read more

Beneficiary

The term beneficiary refers to the individual or entity designated by the account or property holder to receive the assets upon the death of the owner. The role of a beneficiary is crucial in estate planning and asset management, as it ensures the transfer of assets is executed according to... Read more

Catch-up Contribution

A catch-up contribution is a special provision in retirement savings plans like 401(k)s and Individual Retirement Accounts (IRAs) that allows individuals aged 50 or older to contribute additional funds beyond the standard annual contribution limits. This provision is particularly beneficial for those who may not have been able to save... Read more

Company Match

Company Match in the context of the 401(k) industry refers to a contribution that an employer makes to their employee’s 401(k) plan based on the employee’s own contributions. It is a common feature of many 401(k) plans and serves as an incentive for employees to contribute part of their salary... Read more

Contribution Rate

The Contribution Rate in the 401(k) industry typically refers to the percentage of an employee's pay that is contributed to their 401(k) plan. There are two types of contributions that can be made to a 401(k) plan: Employee Contributions: This is the amount of money that an employee elects to... Read more

Default Investment

The concept of a Default Investment in a 401(k) plan is a critical component of modern retirement planning, especially given the rise of automatic enrollment features in such plans. When employees are automatically enrolled in their company's 401(k) plan, they are contributing a portion of their paycheck towards their retirement... Read more

Defined Contribution Plan

A Defined Contribution Plan is a type of 401k retirement plan in which an employer, employee, or both make contributions on a regular basis. In most cases, an employee will elect to have a portion of their salary paid directly into the plan. These contributions are typically invested on the... Read more

Distribution

Distribution refers to the process of taking money out of a 401(k) plan. When participants in the plan, who are typically employees, decide to take money out of their accounts, it is known as taking a distribution. This can occur upon reaching retirement age, which is defined by the plan... Read more

Diversification

Diversification refers to an investment strategy aimed at managing and reducing risk by spreading your investments across a wide range of assets. This approach involves not just investing in different asset classes like stocks, bonds, and cash equivalents, but also diversifying within those classes. For example, within the stock portion... Read more

Early Distribution Penalty

The Early Distribution Penalty refers to a financial penalty imposed on individuals who withdraw funds from their retirement accounts, such as an Individual Retirement Account (IRA) or a 401(k) plan, before reaching a specified age. The age at which you can start making penalty-free withdrawals from these accounts is 59... Read more

Early Withdrawal Penalty

An Early Withdrawal Penalty is a fee that you may incur if you withdraw funds from certain types of long-term savings accounts, such as Individual Retirement Accounts (IRA) and 401(k) plans, before a specific age or time frame. The goal of these penalties is to discourage individuals from using their... Read more

Elective Deferral

An Elective Deferral, as it pertains to a 401(k) retirement savings plan, is an important feature that allows employees to contribute a portion of their wages to the plan on a pre-tax basis. Here’s a more detailed look at the various aspects of Elective Deferrals: Pre-Tax Contributions: When employees opt... Read more

Eligibility

With a 401(k), eligibility refers to the requirements that an employee must meet in order to participate in a 401(k) plan. These requirements are set by the employer and may vary from plan to plan. They typically include factors such as: Age: The employee must be at least 21 years... Read more

Employee Retirement Income Security Act (ERISA)

The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. In a 401k, ERISA is particularly significant because it ensures that the entities that... Read more

Employer Stock

Employer stock in a 401(k) plan refers to the shares of the sponsoring employer’s own company that are offered as an investment option within the company's 401(k) retirement plan. Employees participating in the 401(k) plan can choose to allocate a portion of their contributions to purchase their employer's stock, sometimes... Read more

Employer-Sponsored Retirement Plan

An employer-sponsored retirement plan is a type of investment plan that allows employees to save for retirement with help from their employer. This term can refer to several different types of plans, but one of the most common is the 401(k) plan. In the 401(k) industry, an employer-sponsored retirement plan... Read more

Enrollment

In the 401k industry, "enrollment" refers to the process by which an employee elects to participate in their employer's 401k plan. This generally involves choosing how much of their pre-tax salary to contribute to the plan (up to a certain limit), and possibly selecting from among the various investment options... Read more

Fiduciary

In the 401(k) industry, the concept of fiduciary responsibility is central to the governance and management of retirement plans. A fiduciary is typically involved in key decision-making processes that affect the plan and its participants. Here are some expanded details on the roles and responsibilities of a fiduciary within this... Read more

Financial Advisor

A Financial Advisor is a professional who provides guidance to individuals and companies on managing their 401(k) retirement plans. Financial Advisors in this context often perform the following roles: Investment Guidance: They assist clients in understanding the various investment options available within their 401(k) plans, such as mutual funds, stocks,... Read more

Fund Expense Ratio

The Fund Expense Ratio in the context of the 401k industry refers to the percentage of a mutual fund, index fund, or exchange-traded fund's (ETF's) total assets that are used for administrative, management, advertising, and all other expenses. This ratio does not include sales loads or brokerage commissions. Fund Expense... Read more

Hardship Withdrawal

A Hardship Withdrawal is a feature in many 401(k) retirement plans that allows participants to withdraw funds from their accounts to meet immediate and heavy financial needs. These withdrawals may be subject to taxes and penalties, depending on the age of the participant and the circumstances of the withdrawal. The... Read more

In-service Withdrawal

In-service withdrawal is a term used in the 401(k) industry to describe a transaction allowing an employee to withdraw funds from their 401(k) plan while they are still employed. This type of withdrawal is often subject to certain rules and restrictions, which can vary depending on the specific plan's guidelines... Read more

Investment Options

Investment options within the 401(k) industry refer to the various types of investments that are available to participants in a 401(k) plan. These options typically include a range of asset classes to cater to the diverse risk tolerance and investment goals of plan participants. Here's a breakdown of common investment... Read more

Loan

In the 401(k) industry, a loan refers to the ability of participants to borrow money from their own 401(k) account balance. Here are some key points about 401(k) loans: Loan Limits: Typically, the maximum amount that an individual can borrow is either $50,000 or 50% of their vested account balance,... Read more

Mutual Fund

Mutual funds within a 401(k) play a pivotal role by offering employees a convenient and relatively straightforward way to participate in the financial markets. Here’s a detailed description of mutual funds in the 401(k) industry: Investment Diversification: Mutual funds are designed to hold a diversified portfolio of assets. This means... Read more

Non-Discrimination Testing

Non-Discrimination Testing in a 401(k) plan refers to a series of tests required by the Internal Revenue Service (IRS) to ensure that a 401(k) plan does not unfairly favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). These tests check that the contributions made by the HCEs are proportional... Read more

Passive Investment

Passive investment for a 401(k) plan refers to a strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. This approach is based on the idea that the market will deliver positive returns over time, without the need to... Read more

Portfolio

The concept of a portfolio within the 401(k) industry is fundamental to retirement planning, and understanding its nuances is key for investors who are working towards securing their financial future. Composition of a 401(k) Portfolio: A 401(k) portfolio typically consists of a variety of investment options. These options are often... Read more

Pre-Tax Contributions

Pre-tax contributions for a 401(k) plan refer to the money that is invested into the retirement plan before any taxes are applied to the individual's income. Here's how it works: Contribution: The employee elects to defer a portion of their salary into their 401(k) plan. Tax Treatment: This deferred salary... Read more

Qualified Default Investment Alternative (QDIA)

A Qualified Default Investment Alternative (QDIA) is a critical component of many 401(k) retirement plans, offering a solution for participants who do not want to, or do not have the expertise to, make complex investment decisions. Here are key aspects that further explain the concept of QDIA: Regulatory Foundation: The... Read more

Qualified Plan

A Qualified Plan in 401(k) industry is a retirement plan that meets the requirements established by the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA), thereby qualifying for favorable tax treatment. Such plans are designed to offer retirement savings opportunities to employees through their... Read more

Rebalance

In a 401(k) plan, which is a retirement savings plan offered by many American employers, rebalancing refers to the process of realigning the weightings of the assets in the portfolio. Over time, as different investments earn different returns, the portfolio can drift from its original asset allocation. This drift can... Read more

Required Minimum Distribution (RMD)

The term required minimum distribution (RMD) refers to the minimum amount of money that a retiree must withdraw annually from their retirement savings accounts starting at a certain age. This requirement is put in place by the IRS to ensure that individuals don't take advantage of tax-deferred growth indefinitely by... Read more

Rollover

With a 401(k) plan, which is a type of retirement savings plan sponsored by an employer, a rollover refers to the process of transferring the funds from your 401(k) account to another retirement plan or individual retirement account (IRA). This can occur when you change jobs or retire. There are... Read more

Roth 401(k)

A Roth 401(k) is a type of retirement savings plan that blends some of the characteristics of a traditional 401(k) with those of a Roth IRA. Within the 401(k) industry, it represents a retirement savings option where contributions are made with after-tax dollars, meaning the money is taxed before it... Read more

Safe Harbor 401(k) Plan

The Safe Harbor 401(k) Plan is a distinctive kind of retirement plan that serves as a subset within the broader 401(k) industry. Here's a more detailed explanation of its key features: Non-Discrimination Tests: Traditional 401(k) plans are subject to rigorous non-discrimination tests, such as the Actual Deferral Percentage (ADP) and... Read more

Salary Deferral

Salary deferral in a 401(k) plan refers to an agreement where an employee elects to have a portion of their salary paid into a 401(k) plan, instead of receiving it directly as cash compensation. This portion of the employee's income is not included in their taxable income for the year... Read more

Target-Date Fund

A target-date fund (TDF) is a type of mutual fund or exchange-traded fund (ETF) specifically designed for retirement savings, commonly found in 401(k) plans, IRAs, and other retirement accounts. These funds are structured with a particular retirement date in mind, which is typically reflected in the fund's name, such as... Read more

Tax Deduction

A tax deduction, within the 401(k) industry, refers to the reduction of taxable income for individuals or businesses that contribute to a 401(k) plan. Contributions to traditional 401(k) plans are typically made with pre-tax dollars, meaning that the amount contributed is deducted from the employee's income before taxes are calculated.... Read more

Tax-Deferred Growth

Tax-deferred growth refers to the concept where investment earnings—such as interest, dividends, and capital gains—accumulate within these retirement accounts without being subject to taxes until the funds are eventually withdrawn. This feature is a key advantage of these types of retirement accounts, allowing individuals to maximize the growth potential of... Read more

Vesting

With a 401(k) plan, vesting refers to the process by which an employee earns the right to keep the employer's contributions to their 401(k) plan. Here's how it typically works: Employee Contributions: Any contributions that an employee makes to their 401(k) plan with their own money are immediately 100% vested.... Read more

Vesting Schedule

A vesting schedule in a 401(k) plan refers to the process by which employees earn non-forfeitable rights to employer contributions made to their 401(k) accounts. In simpler terms, it's the timetable on which an employee becomes entitled to keep the employer's contributions to the 401(k) plan, often based on the... Read more

Withdrawal

In the 401(k) industry, withdrawal refers to the action of taking money out from a 401(k) plan, which is a retirement savings plan sponsored by an employer. It lets workers save and invest a portion of their paycheck before taxes are taken out. Withdrawals can be of several types: Regular... Read more

Year-End True-Up

The term Year-End True-Up in the 401(k) industry refers to the process of ensuring that employees receive the full employer match to which they are entitled based on their annual contributions. Throughout the year, employers may match employee contributions on a per-pay-period basis. However, if an employee's contributions vary during... Read more

401k Glossary