Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Active management	A money-management approach based on informed, independent investment judgment, which assumes that returns can be improved through active trading, stock selection and market timing as opposed to passive management ( indexing ) which seeks to match the performance of the overall market (or some part of it) by mirroring its composition or by being broadly diversified .
Annualized rate of return	Expresses the rate of return over a given period on an annual basis, or as a return per year.
Annuity	A contract between an insurance company and an individual. The contract generally guarantees lifetime income to the person in return for either a lump-sum payment or a periodic payment to the insurance company.
Appreciation	Increase in the value of an investment over time.
Asset Allocation	The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual's or institution's specific situation and goals. A key concept in financial planning and money management.
Bond	A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.
Capital Appreciation	An increase in the market price of an asset.
Capital Gain	The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax, opposite of capital loss.
Co-fiduciary	In general, any fiduciary of an ERISA-covered plan. Co-fiduciary status refers to the duties and responsibilities of one fiduciary with respect to the acts or omissions of another fiduciary of a plan.
Common Stock	An investment representing ownership interest in a corporation. Each stockholder is part owner of the company.
Correlation	A measure (ranging in value from 1.00 to -1.00) of the association between a dependent variable (fund or portfolio) and one or more independent variables (indexes). A correlation coefficient is a measure of the strength of the relationship, rather than a measure of causality. A correlation coefficient of 1.00 implies that the variables move perfectly in lockstep; a correlation coefficient of -1.00 implies that they move inversely in lockstep; and a correlation of 0.00 implies that the variables are uncorrelated.
Defined Benefit Plan	A plan that is designed to provide participants with a definite benefit at retirement (e.g., a monthly benefit of 20 percent of compensation upon reaching age 65). Contributions under the plan are determined by reference to the benefits provided, not on the basis of a percentage of compensation.
Defined Contribution Plan	A plan that provides an individual account for each participant and in which benefits are based solely upon the amount contributed to the account (plus or minus any income, expenses, gain, and losses allocated to the account).
Direct Rollover	A distribution to an employee made in the form of a direct trustee-to-trustee transfer from a qualified retirement plan to an eligible retirement plan.
Discrimination	A situation in which a plan, through its provisions or through its operations, favors officers, shareholders, or highly compensated employees to the detriment of other employees.
Diversification	A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds, and real estate, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
Department of Labor (DOL)	The non-tax (regulatory and administrative) provisions of ERISA are administered by the Department of Labor. The Department issues opinion letters and other pronouncements, and requires certain information forms to be filed.
Documentation	Physical evidence, such as a written contract, that explains the responsibilities, rights, and duties of each party.
Dollar-Cost Averaging	A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.
Efficient Market Hypothesis	The Efficient Market Hypothesis says that market prices are fair: they fully reflect all available information. This does not mean that prices are perfect; some prices may be too high and some too low, but there is no reliable way to tell. In an efficient market, investors cannot expect to earn above-average profits without assuming above-average risks. Market efficiency does not suggest that investors can't "win." Over any period of time, some investors will beat the market, but the number of investors who do so will be no greater than expected by chance.
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.
ERISA	Employee Retirement Income Security Act of 1974. This is the basic law covering qualified plans and incorporates both the pertinent Internal Revenue Code provisions and labor law provisions. ERISA is the basic law designed to protect the rights of beneficiaries of employee benefit plans offered by employers, unions, and the like. ER1SA imposes various qualification standards and fiduciary responsibilities on both welfare benefit and retirement plans, and provides enforcement procedures as well. In the retirement area, it also provides standards for tax qualification.
Fiduciary	Any person who exercises discretionary authority or control over the management or disposition of plan assets, or who gives investment advice to the plan for a fee or other compensation.
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 401 (k)'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.
401(k) Plan	A subtype of profit sharing plan that permits participants to elect to defer a portion of their salaries on a pre-tax basis. An employer may encourage participants’ salary deferrals by offering to match the deferrals with an employer contribution. 401(k) plans are subject to special rules and restrictions beyond those applicable to regular profit sharing plans.
403(b) Plan	A plan sponsored by a section 501(c)(3) tax-exempt organization (including a church) or a state educational organization funded with annuity contracts or custodial accounts (mutual funds). Also referred to as tax-sheltered annuities (TSAs) or tax-deferred annuities (TDAs), these plans may permit employee deferrals only, or a combination of employee deferrals and employer contributions, whether by a percentage of pay or pursuant to a matching formula. These plans may be subject to Title I of ERISA if not a governmental plan and if the employer is deemed to be actively maintaining a plan under ERISA.
Includible Compensation	For the purpose of calculating the employee’s exclusion allowance for the taxable year, the amount of compensation received that is includible in gross income for the most recent period that may be counted as one year of service.
Index Funds	A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.
Indexing	A passive investment strategy in which a portfolio is designed to mirror the performance of a stock index, such as the S&P 500.
Inflation	The loss of purchasing power due to a general rise in the prices of goods and services.
Investment Costs	The total amount spent on a particular investment, including the price of the investment itself, plus commissions, fees, other transaction costs, and taxes.
Investment Policy Statement (IPS)	The primary purpose of an investment policy statement is to outline the process that a plan’s sponsor intends to use in selecting and monitoring investments within the company’s retirement plan. Although a great deal of thought must go into creating a prudent investment policy, the investment policy statement (IPS) itself need not be a complex and overly detailed document. The IPS should, in a clear and understandable manner, outline all of the issues and criteria used in creating a prudent investment philosophy. Additionally, it should serve as an essential tool or a roadmap for a plan sponsor in overseeing the investment policy on an ongoing basis. Once an investment policy is created, there is still additional ongoing work. It is the responsibility of the plan sponsor to implement and oversee the investment policy based on the roadmap provided by the investment policy statement. By continually comparing the plan to the original goals and assumptions laid out within the investment policy statement, the plan sponsor can be assured that the goals of the plan are fulfilled. Additionally, the investment policy will be modified whenever there are significant changes in plan demographics. For instance, corporate changes, such as takeovers or mergers, warrant a review of the investment policy to ensure that participants’ needs are still properly addressed.
Living trust	A trust created for the trustor and administered by another party while the trustor is still alive. A living trust can be either revocable or irrevocable. A living trust avoids probate and therefore gets assets distributed significantly more quickly than a will does. It also offers a higher level of confidentiality, as probate proceedings are a matter of public record. Additionally, trusts are usually harder to contest than wills. On the downside, a living trust takes longer to put together than a will, and requires more ongoing maintenance. Although both a will and a living trust can be modified or revoked at any time before death, such changes are slightly more time-consuming for a living trust. Additionally, assets that a person wants to move to a living trust, such as real estate and bank or brokerage accounts, have to be retitled.
Long-Term Capital Gain	A capital gain or loss on an investment which was held for at least some minimum amount of time (often a year and a day). A long-term gain usually results in a lower tax rate than a short-term gain.
Lump-Sum Distribution	A type of distribution that is required for purposes of using the forward averaging method in computing the income tax that is due. The basic requirements to qualify as a lump-sum distribution are (1) the distribution must be made within one taxable year of the recipient; (2) it must include the entire balance credited to an employee’s account; and (3) it must be made on account of an employee’s death, separation from service (except in the case of a self-employed person), or attainment of age 59 (or, in the case of a self-employed person only, on account of disability).
Modern Portfolio Theory	Overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return. This calls for a market portfolio to be created (which is a hypothetical portfolio containing every security available to investors in a given market in amounts proportional to their market values). This theory recommends that the risk of a particular stock should not be looked at on a standalone basis, but rather in relation to how that particular stock's price varies in relation to the variation in price of the market portfolio. The theory goes on to state that given an investor's preferred level of risk, a particular portfolio can be constructed that maximizes expected return for that level of risk.
Money market account	A savings account invested in short-term securities that are easily turned into cash. Money market accounts offer investment safety.
Money Purchase Pension Plan (MPP)	A defined contribution plan under which the employer’s contributions are mandatory and are usually based on each participant’s compensation. Retirement benefits under the plan are based on the amount in the participant’s individual account at retirement. (MPP)
Mutual fund	A mutual fund is operated by an investment company, which raises money from shareholders and invests in stocks, bonds, options, commodities or money market securities. A mutual fund offers the advantages of diversification and professional management, for which the investment company charges a fee.
Named Fiduciary	A fiduciary who is named in the plan instrument or identified through a procedure set forth in the plan. One of the distinguishing features of the named fiduciary is that he or she has the authority to designate others to carry out fiduciary responsibilities (e.g., invest the plan funds).
Passive management	A money management strategy that seeks to match the return and risk characteristics of a market segment or index, by mirroring its composition. also called passive portfolio strategy.
Plan Administrator	The individual or firm responsible for performing duties incidental to the maintenance of an ongoing welfare or retirement plan, such as determining eligibility for benefits, processing benefit claims, and so on. If the plan does not designate an administrator, the plan sponsor is the plan administrator.
Plan Sponsor	An employer who sets up a pension plan.
Price/book ratio	The price/book (P/B) ratio of a company is calculated by dividing the market price of its stock by the company's per share book value. Stocks with negative book values are excluded. In theory, a high P/B ratio indicates that the price of a stock exceeds the actual worth of a company's assets while a low P/B ratio indicates that the stock is a bargain. When applied to mutual funds, the P/B ratio is the weighted average of all the stocks in a fund's portfolio.
Price/earnings ratio	The price/earnings (P/E) ratio is calculated by dividing the current stock price by its trailing twelve months earnings per share. When applied to mutual funds, it's the weighted average of the P/E ratio of the stocks in the fund's portfolio. A high P/E generally indicates that the market is paying more to buy the stock because it's confident of the company's ability to increase its earnings. A low P/E often indicates that the market has less confidence that the company's earnings will increase rapidly and therefore will not pay as much.
Profit Sharing Plan	A defined contribution plan under which the employer agrees to make discretionary contributions (usually out of profits). A participant’s retirement benefits are based on the amount in his or her individual account at retirement.
Prudent-Investor Act	The fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830: "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." Some states which don't have specific legal lists require fiduciaries to uphold the Prudent Investor Act, also called prudent man rule.
Prudent-Man Rule	The standard under which a fiduciary must act. The fiduciary is required to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."
Qualified Retirement Plan (Qualified Plan)	A plan that meets the requirements of the Internal Revenue Code (generally Section 401 (a)) . The advantage of qualification is that the plan is eligible for special tax considerations. For example, employers are permitted to deduct contributions to the plan even though the benefits provided under the plan are deferred to a later date.
Rebalancing	The reweighting of return streams of a composite so that they match a target allocation. It is usually performed on a periodic basis.
Registered Investment Adviser (RIA)	Investment advisor registered with the SEC. No certification is required.
Request For Proposal (RFP)	An invitation for providers of a product or service to bid on the right to supply that product or service to the individual or entity that issued the RFP.
Return	(1) The annual return on an investment, expressed as a percentage of the total amount invested--also called rate of return (2) The yield of a fixed income security.
Risk	Uncertainty regarding the expected rate of return on and/or principal value of an investment.
Risk/Return trade-off	The relation between risk and return that usually holds, in which one must be willing to accept greater risk if one wants to pursue greater returns. also called risk/reward trade-off.
Risk tolerance	An investor's ability to handle declines in the value of his/her portfolio.
Rollover	A tax-free transfer of cash or other assets from one retirement plan to another. An IRA account owner may shift assets from his or her present IRA to another. Certain payouts from a pension plan may also be rolled over to an IRA or to another employer’s plan.
Rollover IRA Account	An individual retirement account that is established for the sole purpose of receiving a distribution from a qualified plan so that the assets can subsequently be rolled over into another qualified plan.
Securities	Stocks, bonds, or other types of investments that represent equity ownership or a debt obligation.
Securities and Exchange Commission (SEC)	The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. The securities and Exchange Commission enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act. The supervision of dealers is delegated to the self-regulatory bodies of the exchanges. The securities and Exchange Commission is an independent, quasi-judiciary agency. It has five commissioners, each appointed for a five year term that is staggered so that one new commissioner is being replaced every year. No more than three members of the commission can be of a single political party. The securities and Exchange Commission is comprised of four basic divisions. The Division of Corporate Finance is in charge of making sure all publicly traded companies disclose the required financial information to investors. The Division of Market Regulation oversees all legislation involving brokers and brokerage firms. The Division of Investment Management regulates the mutual fund and investment advisor industries. And the Division of Enforcement enforces the securities legislation and investigates possible violations.
Self-Employed Person	A sole proprietor or a partner in a partnership.
Short-Term Capital Gain	A capital gain or loss on an investment which was held for less than some minimum amount of time (often a year and a day). A short-term gain usually results in a higher tax rate than a long-term gain.
Simplified Employee Pension Plan (SEP)	A retirement program that takes the form of individual retirement accounts for all eligible employees (subject to special rules on contributions and eligibility).
S&P 500 Composite Stock Price Index	An index is a group of investments that can be used as a yardstick to measure other similar investments. The Standard & Poor's 500 is an index of 500 stocks. It is often used as a standard measure in assessing the performance of large company stocks.
Standard deviation	This is normally an annualized statistic based upon 36 monthly returns. A high standard deviation means a fund's range of performance is very wide, which increases the potential for volatility. Approximately 68% of the time, the total return of any given fund will differ from its average total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total return will be within a range of plus or minus two times the standard deviation from its average total return.
Structured Asset Class Funds	Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, all with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.
Summary Plan Description (SPD)	A detailed, but easily understood, summary describing a pension plan’s provisions that must be provided to participants and beneficiaries.
Tax-managed Fund	A mutual fund which is designed specifically to minimize tax consequences for its investors.
Top-Heavy Plan	Beginning in 1984, a plan that primarily benefits key employees is considered top-heavy and qualifies for favorable tax treatment only if, in addition to the regular qualification requirements, it meets several special requirements.
Trusted Advisor	An advisor who acts in a fiduciary & advisory capacity for the benefit of the client.
Trustees	The parties named in the trust instrument or plan that are authorized to hold the assets of the plan for the benefit of the participants. The trustees may function merely in the capacity of a custodian of the assets or may also be given authority over the investment of the assets. Their function is determined by the trust instrument or, if no separate trust agreement is executed, under the trust provisions of the plan.
Vested Benefits	Accrued benefits of a participant that have become nonforfeitable under the vesting schedule adopted by the plan. Thus, for example, if the schedule provides for vesting at the rate of 10 percent per year, a participant who has been credited with six years of service has a right to 60 percent of the accrued benefit. If he or she terminates service without being credited with any additional years of service, he or she is entitled to receive 60 percent of the accrued benefit.
Voluntary Contributions	Amounts that a participant voluntarily con-tributes to a plan in addition to the contributions made by the employer. Up to 10 percent of the employee’s compensation is generally considered reasonable. Voluntary contributions, unlike employer contributions, are not deductible on the employee’s tax return.
Year of Service	A 12-month period during which an employee is credited with at least 1,000 hours of service. For purposes of determining an employee’s exclusion allowance, a different calculation is made.
Wall Street	Name for the financial district in lower Manhattan, New York City, and the street where the NYSE, AMEX and many banks and brokerages are located. Sometimes also used to refer to the investment community in general.
Yield	Rate of return on a bond, taking into account the total of annual interest payments, the purchase price, the redemption value and the time remaining until maturity.

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