Glossary of 401(k) Terminology

April 1, 1998
401(k): A savings plan that serves as a tax-deferred investment and personal pension fund for employees. (The name refers to the relevant section in the tax code.)

403(b): A tax-sheltered annuity that serves as a retirement plan for employees of tax-exempt organizations and public schools who aren’t able to participate in section 401(k) plans. It also is referred to as a TSA plan.

Asset allocation: The division of holdings among different types of assets, such as domestic stocks, international stocks, bonds, real estate and cash.

Bear market: A stock market in which prices decline over a prolonged period of time, producing losses for investors.

Bull market: A market in which stocks increase in price, thus producing gains for investors.

Employee stock ownership plan (ESOP): A qualified retirement plan designed to give workers an ownership stake in the company. Companies contribute shares of stock without requiring employees to invest their own money.

Employee stock purchase plan (ESPP): A plan established by a company that permits employees to buy company stock, usually at a discount.

Employer contribution: An incentive for employees to save for retirement. The employer typically matches a worker’s contribution, or a portion of it.

Guaranteed investment contract (GIC): An investment contract, funding agreement or guaranteed interest contract in which an insurance company agrees to guarantee a fixed or variable rate of interest or a future payment that’s based on an index or similar criteria. A GIC is payable at a predetermined date on funds that are deposited with the insurance company without regard to the continuance of human life.

Pension plan: A retirement plan offered by some employers that pays a set amount each year during retirement.

Qualified retirement plan: Any of several types of plans that have been approved by the IRS for tax-favorable treatment. These include: 401(k)s, SEPs, IRAs, Keoughs, SIMPLEs, defined benefit pension plans, defined contribution pension plans and more. Each plan has a different limit on the amount an employee and employer can contribute.

SOURCE: Financial Network

Workforce, April 1998, Vol. 77 No. 4, p. 76.