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Glossary of Terms - E through KThis glossary of investment and retirement related terms provides simple definitions of terms that you may need to know. E eEarnings multiplier An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates. Earnings per share The net income of the firm divided by the number of common stock shares outstanding. Earnings yield Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio. Elective deferral An amount contributed to a 401k plan by an employee. Elective deferrals can be either pre-tax or designated as Roth contributions if the plan has a Roth option. Eligible automatic contribution arrangement A type of automatic contribution arrangement that may be included in a 401k plan. Under the feature, a participant may elect to receive a one-time distribution of elective deferrals withheld under the automatic contribution arrangement. The arrangement must satisfy a uniformity requirement and a notice requirement. Employer matching contribution The amount, if any, that the employer contributes to the employee's 401k account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit. Employer discretionary contributions Some employers also make an additional contribution at plan-year end in the form of increased matching contributions and/or a profit sharing contribution. These employer contributions are considered a tax-deductible business expense and also grow on a tax-deferred basis. Enhanced matching contribution A matching contribution under a safe harbor 401k plan that provides each participant with a matching contribution that is greater than the basic matching contribution. Equity risk premium An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk. Equities Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock. ERISA Employee Retirement Income Security Act or ERISA. This law was passed in 1974 and is a comprehensive package dealing with all areas of pensions and employee benefits, not just 401k plans. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. Excess returns Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index. Exchange Traded Fund (ETF) An Exchange Traded Fund is essentially a passively managed open ended mutal fund. Similar to stock, each ETF has a ticker and is traded on stock exchange. Expected return The average of a probability distribution of possible returns. Expense ratio The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.
401k plan A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401k plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401k plan carries many unique advantages for both employer and employee. 403(b) plan SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and nonprofit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares. 404(c) Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments. Face value The stated principal amount of a debt instrument. Fiduciary An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. For example, any person who exercises any discretionary authority or control over the management of a 401k retirement plan or its assets. A fiduciary is to act solely in the interest of plan participants and their beneficiaries. Fiscal year An accounting period consisting of 12 consecutive months. Fixed match A matching contribution that is specifically provided for in the plan document and that must be contributed each year unless and until the plan is amended. Fixed-income securities Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times. Public and private bonds, government securities, and the 401k's guaranteed accounts, are fixed-income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal. Frozen plan A plan under which accruals and/or contributions have ceased but assets are still held for participants and beneficiaries. Fundamental analysis This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.
General obligation bond (GO) A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project. GNMA (Ginnie Mae) Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association. Glide path The gradual reduction of risk within a portfolio based on the number of years to a target date, achieved by adjusting the allocation of assets to more conservative investments. It is typically used when referring to target-date mutual fund strategies. Going public Selling privately held shares to new investors for the first time. Gross domestic product (GDP) A measure of output from United States factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets. Guaranteed investment (interest) contract (GIC) Debt instrument sold in large denominations issued by Insurance Companies and often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk. The company issuing the GIC makes the guarantee, not the U.S. Government.
Hardship withdrawal An in-service distribution from the plan which is made because the participant has suffered severe financial difficulty or an extraordinary event as defined by the plan document. Go to 401k Hardship Withdrawals for a detailed overview. Highly compensated employee A Highly Compensated Employees (HCE) is one who owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or for the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2012 or 2013), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation. Holding period return/yield Income plus price appreciation during a specified time period divided by the cost of the investment.
Payment of interest and dividends earned on a fund's portfolio of securities after operating expenses are deducted. Income fund A common trust fund or mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest. Index fund A common trust fund or mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard & Poor's 500-stock index. Individual retirement account (IRA) A personal, tax-sheltered retirement account available to wage earners not covered by a company retirement plan or, if covered, meet certain income limitations. Individual retirement account (IRA) rollover A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to "roll-over" into, or invest that sum in, an IRA. IRA funds can be "rolled-over" from one investment to another. Income statement The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss. Index A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S. Inflation risk This is the risk that inflation may undermine the performance of investments and reduce the future real value of any investments after inflation has been taken into consideration. Inflation The loss of purchasing power due to a general rise in the prices of goods and services. In-service withdrawal A withdrawal from a retirement savings plan by a participant who remains employed. In-service withdrawals are severely restricted by law and most plans.
Insider trading Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences. Integration A pension design tool in which contributions reflect the existence of Social Security benefits. In this process, FICA taxes are considered part of the contribution to the pension fund. Since Social Security provides a greater percentage benefit to lower paid employees, integration allows the company to increase contributions to higher paid employees. Interest What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other form of IOU. Investment adviser A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested. Investment risk This is the risk that an investment may not generate the desired returns over time, and may even result in the loss of any initial capital invested.
Junk bond Bond purchased for speculative purposes. They are usually rated "BB" and lower, and they have a higher default risk.
Keogh plan A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares. (Also know as H.R. 10 Plans.) Key employee An employee who at any time during the plan year is meets certain income or ownership criteria. | ||||||||||||||||
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