Pension Terms you should know

Annuity

• A promise to make periodic payments to someone for a set time.

Benefit 

• The right of the participant to either cash or services after meeting eligibility requirements, usually monthly payments payable on retirement or disability.

Cliff Vesting 

• Full (100%) vesting after a certain number of years of service, but with no gradual vesting before that time.

Deferred Vested Pension 

• The normal or early retirement pension earned by a vested participant who separates from service before they are eligible for retirement.

Defined Benefit Plan 

• A traditional pension providing a guaranteed annual/monthly benefit based on a formula including factors such as years of service.

Defined Contribution Plan 

• The right of the participant to either cash or services after meeting eligibility requirements, usually monthly payments payable on retirement or disability.

Form 5500

• The annual tax return filed by employee benefit plans which itemizes all income, expenses, assets, and liabilities.

ERISA

• The Employee Retirement Income Security Act - legislation passed in 1974 to set minimum pension standards and to dictate how pension funds must be administered for the sole benefit of participants, retirees, and beneficiaries.

Fiduciary

• Anyone who has discretionary control over the operation of a pension plan and its assets.

Graded Vesting

• A vesting schedule that sets up partial vesting (such as 50%) after a specific length of service, then increases each year until 100%, typically from 3 to 7 years.

Inland Steel Decision

• A 1948 ruling of the National Labor Relations Board (NLRB) that pensions are included in the law requiring companies to bargain with unions over wages, hours, and other conditions of employment.

IRA

• Individual Retirement Account - A do-it-yourself retirement plan available to all wage earners and spouses.  Taxes on contributions and earnings may be deferred until withdrawal at retirement.

Joint and Survivor Coverage

• Payment of the pension benefit to the participant and spouse until both die.  After the death of the participant, the spouse receives a percentage of the participant's pension benefits.

Keogh Plan

• A tax-deferred qualified retirement plan for self-employed individuals and unincorporated businesses.

Participant

• An individual who is accruing or maintaining rights in a pension plan.

PBGC

• Pension Benefit Guaranty Corporation - A non-profit organization established by ERISA to provide basic minimum insurance against the loss of primary pension benefits in the event of a pension plan termination.  This only applies to defined benefit plans, not defined contribution plans.

Pension

• A group savings plan that has the exclusive purpose of providing a secure retirement income for those who leave the work force because of age.

Pension Plan

• A negotiated benefit whereby the employer and/or the employee contribute regularly to a federally approved plan that will yield a benefit upon retirement.

Portability

• The ability to transfer accumulated benefits from one plan to another when a worker changes jobs.

QDRO

• Qualified Domestic Relations Order - A court order required by ERISA allowing a pension plan to distribute a portion of benefits to a divorced spouse.

Qualified pension plan

• A tax-qualified pension plan approved by the IRS.  "Tax-qualified" means the company can take a tax deduction for its contributions to the pension plan.

REACT

• Retirement Equity Act of 1984 - A federal law that amended ERISA with the purpose of providing greater pension equity for women workers and surviving spouses.

Roth IRA

• An Individual Retirement Account based on after-tax contributions.  Earnings on contributions and distribution of funds are not taxed.

Rule of 45

• An ERISA vesting formula which provides that a participant with five years of service and who is at least 40 years old will be partially vested.

Severance Benefit

• Dismissal, termination, or separation pay.

Summary Annual Report

• An annual financial statement sent to all fund participants and retirees briefly describing the income, expenses, assets, and liabilities of a pension plan, and scribing the right to obtain a full annual report (Form 5500).

Summary Plan Description

• A summary of the provisions of a pension plan, as delineated in the Plan Document.

Surviving Spouse Benefit

• Payments to the spouse of a deceased participant.

Three-legged stool

• The theory that says a combination of an individual's savings, Social Security, and a private pension fund is in the best interests of the participants and working citizens.

Trustee

• One responsible for managing the assets of a pension fund in the best interests of the participants.

Vesting

• Ownership - when a participant is "vested," they own their benefits.

Investment Terms you should know

AAA, AA, A, BBB, BB, B..... D

• Bond Ratings assigned by Standard and Poor's Corporation to various investment grade bonds.  AAA (Triple A) is the highest rating and means the capacity of the issuer to pay interest and repay principal is extremely strong.  D bonds are the least likely to be able to repay.

Aggressive Growth Fund

• A mutual fund that seeks maximum capital gains by investing in somewhat riskier stocks.

AMEX

• American Stock Exchange - Located in New York City, it is the largest market for foreign securities in the United States.

Appreciation

• Increase in the value of an investment.

Asset

• Type of investment (stock, bond, money, or real estate).

Asset Allocation

• Investment strategy mixing types of assets, typically discussed in terms of percentages put into certain categories of investments: i.e., common stocks, bonds, insurance companies, cash, or real estate.

Balanced Fund

• A mutual fund that invests in a mix of bonds, preferred stocks, and common stocks with the three-part goal of conserving the investors initial principal, paying current income, and achieving long-term growth.

Bear Market

• A period of time when stock prices have a sustained downward trend.

Blue-Chip

• Stock in a high-quality corporation, like IBM.

Bond

• A debt instrument of a government or corporation that provides periodic interest payments to the holder during the life of the contract and repays the face value.

Bond Fund

• A mutual fund that hold corporate, municipal, or U.S. Treasury bonds with the objective of security of principal with as much income as possible.

Bull Market

• A period of time when stock prices have a sustained upward trend.

Capital

• The value of an asset.

Capital Growth

• The increase in the principal value of an investment.

Capital Loss

• The decrease in the principal value of an investment.

CD

• Certificate of Deposit - Certification from a bank or savings and loan association that a fixed dollar amount has been deposited with it for a fixed period of time at a predetermined rate of interest.

CPI

• Consumer Price Index - A series of numbers in the U.S. and Canada to measure the relative prices at various times of a select group of goods and services typical of a urban family's living costs.

Diversification

• The spreading of investments among different kinds of assets.

Dividend

• The earnings of a corporation passed on to shareholders.

Dollar Cost Averaging

• Buying a certain predetermined dollar amount of securities at regular intervals (weekly, monthly).  This disciplines investors to buy more shares when prices are low and to buy fewer shares when prices are higher, there by creating an average market cost over time.

Dow Jones Industrial Average

• The weighted average of the prices of 30 stocks issued by large industrial firms actively traded on the New York Stock Exchange.

Equity

• Common stock or ownership in a company.

Fed

• Short for the Federal Reserve System.  The central banking system of the U.S., supervised by the Federal Reserve Board, which determines the prime interest rate.

Fixed Income Investment

• Securities, usually bonds, which provide a constant dollar amount of incomes for a specific period of time.

Fund Objective

• The basic purpose for investing a fund, for example, capital preservation and/or the potential for growth and income.

Growth Fund

• A mutual fund that invests in stocks of more settled companies with the potential for long-term capital appreciation.

Inflation

• Declining value of money due to rising prices.

Investment Objectives

• Long-term risk / return targets, based on personal goals and preferences and a forecast of the future.  Age is usually a primary factor in setting investment objectives.

Liquidity

• Assets that consist of or are capable of being converted quickly into cash.

Money Market Fund

• A mutual fund which seeks maximum current income through investments in securities whose maturities are less than one year.  Such securities may include cash equivalents, such as bank CDs, Treasury Bills, etc.

Mutual Fund

• An investment company that buys and sells stocks, bonds, and other financial assets of publicly traded corporations and/or governments on behalf of a number of investors.

Mutual Fund Expenses

• The cost of operating a mutual fund, including advisory fees and administration.  Also called an expense ratio because it is expressed as an annual percentage of a fund's total net assets.

NASDAQ

• National Association of Securities Dealers Automated Quotations.

NYSE

• New York Stock Exchange - a New York City unincorporated voluntary association founded in 1792 with a written constitution in which only certain brokers have a "seat", or the right to buy and sell securities.

Principal

• Money invested.

Portfolio

• The combined assets of an individual or institution.  The portfolio may include bonds, stock, cash, other securities, and real estate.

Prospectus

• An official selling circular that must be given to purchasers of new securities registered with the Securities & Exchange Commission highlighting the longer Registration Statement filed with the Commission.

Return

• The pattern of fund performance over time, including dividends, interest, and capital gains and losses.

Risk

• The change in the rate of return over time.  This includes the possibilities that money which has been invested will decrease in value.

SEC

• Security and Exchange Commission - set up in 1933 by Congress to protect investors.

Securities

• An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity.

S&P 500 Index

• The Standard and Poor's 500 Index is designed to measure performance of stocks.  It is composed of the prices of 500 widely held stocks.

Stock

• Share of ownership in a corporation.

Variable Annuity

• Form of annuity where the benefit varies with the performance of the investments.

Volatility

• A measure of how much the rate of return or market value of an investment changes.