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Retirement Terminology
From time to time you probably read news articles about Retirement Plans
or how to invest your savings. Following is a list of terms and their
definition that may be helpful for you to know.
Accrued Benefit: A benefit that an employee
has earned through participation in a retirement plan. In a 401(k) plan,
this is the value of the participant's account at a given time. The
participant may not have an absolute nonforfeitable right to this benefit,
however.
Active Management: Investment management
with the goal of selecting specific securities from a given universe
in an attempt to outperform the average of that universe. (See Passive
Management.)
Asset Allocation: The apportionment
of funds in a 401(k) plan or other investment portfolio among different
asset classes, for example, 35 percent in domestic common stock funds,
35 percent in bond funds, 15 percent in foreign stock funds, and 15
percent in money-market funds.
Asset Classes: Classifications of investments
that make up a portfolio, most commonly stocks, bonds, and short-term
reserves.
Capital Gain (Loss): An increase (decrease)
in the market or principal value of a fund's securities. Among mutual
funds this is reflected in the net asset value of its shares. Among
individual stocks, such as IBM, this is reflected in the value of its
stock.
Cash Equivalents: See Money-Market Instruments.
CODA: Acronym for Cash Or Deferred Arrangement
means that an eligible employee has the right to decide whether he wants
his employer to contribute a specific amount to a retirement plan on
his behalf or to pay him an equivalent amount in cash.
Common Stocks (or Equities): Shares
in a company evidencing proportional ownership of that corporation.
Conduit (or Rollover) IRA: An individual
retirement account established to accept a rollover from a qualified
retirement plan. Funds in a conduit IRA subsequently may be rolled into
another qualified retirement plan.
Currency Risk: The chance that foreign
securities, denominated in foreign currencies, could decline in value
in terms of U.S. Dollars if the dollar should rise in value against
those other currencies.
Defined Benefit Plan: Traditional retirement
plan that promises an employee-participant specific fixed future benefits
determined according to a formula that usually depends on the employee's
earnings, years of employment by the company, or both. Contributions
are not preestablished since the amounts that will have to be contributed
will vary depending on the returns realized on investments. Risk is
borne by employers, not employees: if investment returns are too low
to fund the payment of predetermined benefits, employers have to ante
up the difference through higher plan contributions.
Defined Contribution Plan: A retirement
plan in which the amount of contributions, but not of benefits, is preestablished,
with the ultimate amount of benefits depending on both the amounts contributed
and the rate of return realized on the plan's assets. To that extent,
the risk of a defined contribution benefit plan is borne by the employee,
not the employer: if investment returns are poor, or too little has
been contributed, the employee's ultimate benefit will be low, and the
employee will have no recourse to his or her employer who, in turn,
will have no obligations to supplement those benefits. Includes 401(k)
plans, profit sharing plans, 403(b)'s, Keoghs, and SEP's.
Diversification: A strategy for spreading
assets among many different securities to reduce the risks inherent
in investing in only one or a small number of securities.
Elective Contributions: Voluntary Employee
Contributions to a 401(k) plan generated from deferred pretax income.
Equities: See Common Stocks.
Financial Planning: (1) The consideration
and evaluation of the financial consequences of alternative economic
choices and the rearrangement of your financial affairs in light of
those considerations. (2) The design of an investment program for the
purpose of achieving one or more specific financial goals, such as the
creation of a college fund for children or grandchildren, the purchase
of a home, or the establishment of a retirement nest egg.
Foreign (or International) Fund: A mutual
fund that invests only in foreign securities (differs from a global
fund, which invests both in U.S. and foreign securities).
Forfeitable Benefits: In a 401(k) plan,
an employer's matching contributions may be subject to a vesting schedule,
in which case a plan participant might forfeit some or all of those
matching deposits if they were to leave their job within less than 7
years. (See Nonforfeitable Benefits.)
401(k) Plan: A cash or deferred arrangement
(see CODA), named after the section of the Internal Revenue Service
Code that authorized it, whereby a covered employee may elect to defer
salary by making pretax contributions to a qualified defined contribution
retirement plan.
403(b) Plan: A qualified defined contribution
retirement plan, named after the section of the Internal Revenue Service
Code that authorized it, which is similar to a 401(k) plan but is available
only to employees of hospitals, schools, churches, and certain other
tax-exempt organizations.
Global Fund: A mutual fund that invests
both in U.S. and foreign securities (differs from a foreign fund or
international fund, which invests only in foreign securities).
Government Obligations (or Treasuries):
U.S. government debt instruments, including treasury bonds, bills, notes,
and savings bonds that the Government has pledged to repay. These are
the safest, most risk free and most creditworthy of all fixed income
securities since they are backed by the full faith and credit of the
U.S. government.
Growth Stock Investing: An approach
to equity investing that entails investing in the stocks of companies
that are growing much faster that the overall economy (in terms of revenues,
earnings, and potential dividends), with less regard to the prices initially
paid for those stocks-if they continue to grow as one expects-since,
even if they were initially statistically overvalued, their future earnings
growth would bail one out.
Guaranteed Investment (or Income) Contract
(GIC): A contract between an insurance company and a corporate profit
sharing or pension plan (such as a 401(k) plan) whereby the plan invests
a sum of money with the insurance company for a specified period of
time and the insurance company, in turn, pays interest on the loan at
a fixed rate over the life of the contract.
Index Fund: A mutual fund or other portfolio
that is passively managed in an attempt at replicating the performance
results of a preselected securities index.
Individual Retirement Account (IRA):
A personal tax-deferred retirement plan that may be established by anyone
under the age of 70 who receives compensation, or by anyone, of whatever
age, seeking to defer taxes by rolling over eligible distributions from
a qualified retirement plan.
Inflation (or Purchasing Power) Risk:
The chance that the overall price level will rise so steeply over time
that, even if your investments appreciate in nominal terms, they may
not appreciate in real terms, i.e., the funds you receive upon selling
an investment will have less real purchasing power than the funds you
originally invested, even though the nominal amount may be the same
or greater.
Interest: The cost of borrowing money,
usually expressed as a rate per year, in which instance it is referred
to as an annual interest rate.
International Fund: See Foreign Fund.
Market Risk: The chance that the value
of an investment will decline to a level below its current market price.
Money Market Funds: Mutual funds whose
investments are limited to money-market instruments or other securities
with average maturities usually measurable in days.
Money-Market Instruments: Commercial
paper, certificates of deposit, treasury bills, and other fixed income
securities with maturities of less than one year. Also known as Cash
Equivalents.
Net Asset Value (NAV): The worth of
a mutual fund's assets, including securities, cash and accrued earnings,
after deducting liabilities, divided by the number of shares currently
outstanding. NAV is expressed as the value of a single share in the
fund.
Nonforfeitable Benefits: 401(k) plan
benefits that belong to a plan participant in their entirety and that
cannot be taken back by his employer under any circumstances. These
include elective contributions, after-tax voluntary contributions by
an employee, vested employer matching contributions, and the earnings
generated by any of those contributions. (See Forfeitable Benefits.)
Passive Management: Investment management
that seeks to structure a diversified portfolio whose return will replicate,
or at least approximate, the average return generated by a preselected
securities universe. (See Active Management.)
Rollover: A tax-free transfer of assets
from one retirement plan to another, such as from one 401(k) plan to
another or from a 401(k) plan to an IRA.
Tax Deferred: A tax-deferred plan (such
as a 401(k) plan, 403(b), IRA, Keogh, or SEP) is one in which any taxes
you might owe are postponed until the future. When you earn income from
tax-deferred savings or investments, you may postpone taxes on that
income until some future date. In addition, any taxes you might otherwise
have had to pay on pretax contributions to a retirement savings plan
and employer's matching deposits to that plan also would be deferred
to the future.
For further information, please visit
us online (site opens in new window)
Union Bank & Trust Company
Retirement Plan Services
323-1828 in Lincoln, or toll-free, 888-769-2362
6811 S. 27th Street (27th & Pine Lake Road)
P.O. Box 82535, Lincoln, NE 68501-2535
*Investment
services offered through Union Bank & Trust Company’s Trust Division.
Investment products: Not FDIC Insured - No Bank Guarantee - May Lose
Value.
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