401(k) Plan: A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck as employee deferrals. Employers may also provide contributions, either by matching or through discretionary contribution
403(b) Plan: A retirement savings plan like a 401(k) designed for employees of public schools, certain non-profit organizations, and certain government agencies.
404(c): Section 404(c) of ERISA provides guidelines that, if followed, can relieve plan fiduciaries from liability for investment losses incurred by participants who direct their own investments.
457(b) Plan: A plan that allows deferral of compensation for state and governmental entities.
ADP/ACP: The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are compliance tests that ensure retirement plans do not disproportionately benefit highly compensated employees over non-highly compensated employees.
Advisor: Assists plan sponsors with investment options, plan design, compliance, and best practices, while also helping participants enroll and establish financial goals. They help optimize the plan’s performance and participant outcomes.
Automatic Enrollment: A plan feature that enrolls eligible employees in the retirement plan automatically with a default deferral contribution rate, unless they opt out or modify the deferral amount. Required for 401(k) and 403(b) plans established after 2022.
Beneficiary: A person designated by the plan participant to receive the plan benefits upon the participant’s death.
Catch-Up Contribution: An additional employee contribution, above the IRS Annual Limit allowed for employees aged 50 and older, enabling them to save more as they approach retirement.
Compliance Testing: Various tests to ensure a retirement plan adheres to IRS and DOL regulations, such as nondiscrimination tests (e.g., ADP/ACP tests) to ensure fairness in contributions and coverage.
Contribution Limit: The IRS determines the maximum annual contribution an employee can defer to their retirement plan, with adjustments for cost-of-living increases each year.
Deferral Contribution: The amount of money that an employee elects to contribute into their retirement plan, which is deducted directly from their paycheck.
Department of Labor (DOL): A U.S. government agency responsible for overseeing labor laws, including regulations related to retirement plans and ensuring they comply with ERISA standards.
Diversification: The strategy of spreading investments across various asset classes to reduce risk.
Employer Match: Contributions made by an employer to an employee’s retirement plan, typically matching a percentage of the employee’s own contributions.
ERISA: The Employee Retirement Income Security Act of 1974 is a federal law that sets standards for pension and health plans in private industry to protect individuals in these plans.
Fidelity Bond: Required insurance that protects a retirement plan against losses caused by fraudulent or dishonest acts by individuals handling plan assets.
Fiduciary: A person or entity with the legal responsibility to act in the best interest of plan participants, managing the plan’s assets prudently.
Form 5500: An annual report filed with the DOL by retirement plan sponsors to provide information about the plan’s financial condition, investments, and operations.
Hardship Withdrawal: A withdrawal from a retirement plan made due to urgent and significant financial need, as defined by IRS regulations, which is often subject to penalties and taxes.
Highly Compensated Employees (HCE): An individual who earns above a specified salary threshold or who owns a significant stake in a company.
In-Service Distribution: A distribution taken from a retirement plan while still employed, which can occur without a tax penalty after age 59.5.
Individual Retirement Account (IRA): A tax-advantaged account that individuals can use to save for retirement. There are different types, including Traditional and Roth IRAs, each with specific tax implications.
Investment Options: The various funds or securities available within a retirement plan for employees to invest in for their contributions, typically including stocks, bonds, and mutual funds.
Key Employees: In retirement plan terms, key employees are individuals who meet specific criteria set by the IRS, primarily related to ownership and compensation. Their status impacts certain compliance tests and plan design considerations.
Loan Provision: A feature that allows participants to borrow money from their retirement plan, subject to specific terms and conditions.
Participant Directed: Allow participants to choose how their retirement contributions are invested from a selection of options provided by the plan.
Plan Administrator: The entity responsible for overseeing the operation of a retirement plan, including day-to-day administration, ensuring compliance with legal requirements, and facilitating transactions for participants.
Plan Sponsor: The employer or organization that establishes and maintains the retirement plan for its employees.
Pooled Employer Plan (PEP): The SECURE Act of 2019 now allows unrelated businesses to band together under one plan creating a cost-effective way for employers to help their employees save for retirement and bring additional fiduciary services to the Plan.
Pre-Tax Contributions: Contributions made to a retirement plan before income taxes are deducted, reducing taxable income for the year.
Profit Sharing/Discretionary Contributions: Refers to employer contributions to a retirement plan that are made at the employer’s discretion, often based on company profits.
Qualified Default Investment Alternative (QDIA): A default investment option for participants who do not make an investment selection. Typically, a diversified portfolio fund like target-date funds.
Recordkeeper: A recordkeeper is responsible for maintaining accurate records of participant accounts, tracking contributions, providing account access, and participant statements.
Required Minimum Distribution (RMD): The minimum amount that must be withdrawn annually from certain retirement plans starting at age 73, as mandated by the IRS.
Rollovers: The process of transferring funds from one retirement account to another, typically without tax or penalties.
Roth Contributions: Contributions made to a retirement plan where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.
Safe Harbor: A retirement plan design in which all participants receive a minimum level of employer contributions, offering employers benefits such as exemption from nondiscrimination testing and easier plan management.
Self-Directed Brokerage (SDB): An account that enables plan participants to invest in a broader array of securities beyond the core offerings of a retirement plan, granting them greater control over investment choices and placing responsibility for those choices on the participant.
SIMPLE: Savings Incentive Match Plan for Employees is a retirement plan that allows small businesses to offer tax-advantaged savings options to employees. Easier to set up and maintain, but less flexible in plan design than a 401k plan.
Summary Plan Description (SPD): A document that provides detailed information about the retirement plan, including benefits, rights, and obligations that employers are required to provide to employees eligible for the retirement plan.
Terminated Force Out: The process by which a plan sponsor may distribute a participant’s account balance if it falls below a certain threshold, typically after employment termination.
Third-Party Administrator (TPA): An entity hired by a retirement plan sponsor to handle administrative tasks such as compliance testing, recordkeeping, and reporting. They ensure the plan complies with legal and regulatory requirements.
Top Heavy: A retirement plan is top-heavy when the owners and key employees own more than 60% of the value of the plan assets. This ratio is tested every year based on the account balances of the prior plan year. If the plan is top heavy an additional employer contribution may be required.
Trustee: An individual or institution responsible for managing the assets held in a retirement plan trust. They have a fiduciary duty to act in the best interests of the plan participants.
Vesting: The process by which an employee gains ownership of employer contributions in their retirement plan. Vesting determines how much of the employer’s contributions you can keep if you leave the company.
