Glossary

401(k) is a defined contribution plan, established by an employer. It enables employees to make pre-tax contributions by salary reduction agreements structured within the format of a cash or deferred plan.

Asset category: A broad group of assets which corresponds to a traditional investment objective -- such as growth, income or stability. Stocks represent the asset category for growth, bonds for income, and cash equivalents for stability.

Asset class: A group of assets which are similar in type and investment objective, for example, large company stocks or international government bonds.

Balanced mutual fund: A mutual fund that purchases common stock, preferred stock, and bonds. Such funds tend to be less volatile than all-equity funds, outperforming them in a declining market but underperforming them in a rising market.

Bond fund: A fund that holds corporate, municipal, or U.S. Treasury bonds, or a combination of those in the attempt to earn as much income as possible while maintaining a high degree of security.

Defined-benefit plan: A pension plan under which the benefit the employee is to receive in the future is predetermined. (Example: $10 per month income at retirement for each year employed.) The amount of the required annual employer contributions depends on the level of benefits to be provided and the estimated number of years in the accumulation period.

Defined-contribution plan: A pension plan under which the amount of the employee's retirement benefit is determined by contributions, not a pre-determined formula. The amount of the employee's benefit equals the accumulated contributions plus earnings the fund will produce in terms of a retirement income or lump-sum payment.

Dividends (investments): The portion of a corporation's earnings that it distributes among its stockholders, in proportion to the number and kind of shares they own. The decision to pay dividends is made by the board of directors, and they usually are paid quarterly, in the form of cash, stock, or rarely, some other property. Preferred stock dividends usually are fixed over a period of time, whereas common stock dividends are more dependent on the company's earnings and current cash position.

Dollar cost averaging: A system of buying a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises. The average price per share is thus lower than it would have been had the investor periodically bought a fixed number of shares.

Employee stock ownership (ESOP): A plan for profit sharing by employees in the companies for which they work. A company introducing an ESOP subscribes cash for common stock (shares) of the company which are deposited with a trust for the benefit of all participating employees. The stock does not immediately become the property of the employees but is vested with them gradually over five or fifteen years.

Individual Retirement Account or Annuity (IRA): A personal investment account that may be established by any individual who has earned income. Annual contributions to an IRA may be deductible from gross income in the calculation of federal and state income taxes (this is severely restricted by Tax Reform 1986 and state laws vary). Income taxes on the earnings are deferred until withdrawal or when annuity payments begin, usually at retirement, at which time the untaxed contributions and earnings are taxed as ordinary income. IRA funds withdrawn prior to age 59½ may also be subject to a 10% federal tax penalty. IRA funds can be invested in stocks, bonds, funds, limited partnership units and annuities. Life insurance, collectibles (other than certain U.S. gold and silver coins) and any investments made on margin are prohibited.

Lump-sum distribution: A distribution in which the entire balance of the retirement plan is received in a single tax year.

Money market fund: A fund that invests in various short-term debt instruments (i.e., commercial paper, negotiable certificates of deposit, banker's acceptances, Treasury bills, etc.). Shares seek to maintain a net asset value of $1 but the interest rate changes daily.

Mutual funds: a type of investment that pools the money of different shareholders and invests in a portfolio of securities. A portfolio manager or portfolio management team selects the securities. Portfolio managers invest the fund's pool of assets in individual securities such as stocks, bonds, or money market instruments. There are different types of mutual funds with different investment objectives and areas of concentration.

Net asset value: Used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.

No-load fund: An open- or closed-end fund investment which charges no fees or commissions upon the sale or redemption of its shares.

Profit Sharing Plan is a defined contribution plan established and maintained by an employer. It allows eligible employees to share in profits generated by the business, while enabling the employer to make annual contributions on a discretionary basis.

 Qualified retirement plan: Plan that meets the qualification requirements set out in detail in Internal Revenue Code sections 401 and 403(a), and as such, are plans established, operated and supported by employers, which have been submitted to and formally approved and "qualified" by the Internal Revenue Service.

Real Estate Investment Trust (REIT): An organization similar to an investment company but concentrating its holdings in property or real estate investments. Real estate investment trusts are required to distribute as much as 90% of their income so the yield is generally very attractive.

Rollover: The nontaxable transfer of assets from one qualified retirement plan to another, such as from a defined contribution plan to an IRA or nontransferable annuity.

Simplified Employee Pension (SEP) is a simplified alternative to a Profit-Sharing or 401(k) plan. The employee is immediately vested in employer contributions and generally directs the investment of the money.

Savings Incentive Match Plans for Employees (SIMPLE): IRAs allow employees to defer compensation and have the added benefit of an employer contribution.