403(b) Glossary 401(k) Plan: 403(b) Plan: 457(b) Plan (Governmental):

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1 403(b) Glossary (k) Plan: A retirement savings plan which permits employees to make voluntarily contributions of amounts that have not already been paid or made available to them. It is named for a subsection of the Internal Revenue Code (IRC). 401(k) Plans may be established or maintained by corporate employers and private not-for profit employers. Governmental employers may maintain grandfathered 401(k) plans (established prior to 1989) but may not establish a new 401(k) Plan. A 401(k) Plan can also include employer contributions as well as transfers and/or rollovers from other plans or IRAs. A 401(k) Plan account must be funded with a trust, a custodial account or an annuity contract, and can include wide array of investments. Distributions of employee contributions from a 401(k) Plan are generally available at 59 ½ or upon severance from employment, death, disability, or financial hardship (deferrals only for a financial hardship), and may be subject to additional plan limitations. Distributions from a 401(k) Plan prior to age 59 ½ generally are subject to an additional 10% tax for premature distributions, although some exceptions apply (b) Plan: A retirement savings plan which permits employees to make voluntarily contributions of amounts that have not already been paid or made available to them. It is named for a subsection of the Internal Revenue Code (IRC). 403(b) Plans may be established or maintained by public schools (including public K-12, community colleges, and higher education institutions) and tax exempt organizations that qualify under IRC Section 501(c)(3) (generally charitable). Qualifying 501(c)(3) organizations can include public hospitals that also satisfy the requirements of that section. A 403(b) Plan can also include employer contributions as well as transfers and/or rollovers from other plans or IRAs. A 403(b) Plan account must be funded with an annuity contract, a custodial account invested solely in qualifying mutual funds, or a combination. Distributions of employee contributions from a 403(b) Plan are generally available at 59 ½ or upon severance from employment, death, disability, or financial hardship (deferrals only for a financial hardship), and may be subject to additional plan limitations. Distributions from a 403(b) Plan prior to age 59 ½ generally are subject to an additional 10% tax for premature distributions, although some exceptions apply (b) Plan (Governmental): A retirement savings plan which permits employees to make voluntarily contributions of amounts that have not already been paid or made available to them. It is named for a subsection of the Internal Revenue Code (IRC). 457(b) Plans may be established or maintained by any state or local public employer, subject to any limitations in applicable state or local laws. A 457(b) Plan can also include employer contributions as well as transfers and/or rollovers from other plans or IRAs. A 457(b) Plan account must be funded with a trust, a custodial account or an annuity contract, and can include wide array of investments. Distributions from a 457(b) Plan are generally available upon severance of employment or 1

2 attainment of age 70 ½ or in the event of an unforeseeable emergency. Distributions from a 457(b) plan prior to age 59 ½ are not subject to an additional 10% tax for premature distributions, except in the case of certain distributions from a rollover account. 4. ACH: Automated Clearing House is an electronic network for financial transactions in the United States. This is the primary method that employers and TPAs use to remit employee salary deduction funds to vendors in retirement plans, particularly multi-vendor 403(b) plans. This can speed up the investment of plan participants funds with their vendors. See also Electronic List Bills. 5. Age 50 Catch Up Contributions: Governmental 457(b) plans may allow participants age 50 or older by the end of the calendar year to contribute an additional $5,500 in 2012 above the elective deferral limit of $17, Creditable Compensation: The amount of compensation used to calculate a participant's monthly annuity under a defined benefit pension plan. Many educators are covered by such plans in the state where they work. 7. Defined Benefit (DB) Plan: A retirement plan in which a guaranteed monthly pension or annuity will be paid to the participant at retirement. The investment risk rests with the plan sponsor as it is required to fund the plan based on an actuary's calculation of the amount that will provide the promised benefit. State pension plans typically provide a monthly pension based on the participant s years of service under the plan multiplied by their average salary for a specified number of years multiplied by a percentage or multiplier. These plans typically require a specified number of years of service and/or age in order to receive a pension. 8. Defined Contribution (DC) Plans: A retirement plan that does not pay a promised monthly pension but accumulates funds in an account. The investment risk rests with each participating employee since the ultimate benefit depends on contributions and earnings. The account balance is paid to the participant at retirement or upon separation from service, depending on the type of DC plan. 401(k) plans, 403(b) plans, and 457(b) plans are examples of DC plans. 9. De Minimis Account: A de minimis account is a participant account that does not exceed $5,000 (or other applicable limit under the Code) and to which the participant has not made a deferral during the previous two-year period. 10. Equity Indexed Annuities (EIA): EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. For more information we recommend that you go to this link on the Financial Industry Regulatory Authority (FINRA) website: Electronic List Bills: When employee salary deductions for retirement plans are sent to a vendor the funds are typically sent in a single payment. In order to break down this payment so that the correct amount is allocated to each participant s account a list bill must accompany the payment. With ACH transmission of funds the remittance of funds happens faster than sending payments by mail. However, if the list bill is sent by mail and not sent electronically, then the speed with which the funds are deposited to the participant s account can be much less. 12. ERISA: The Employees Income Security Act of This landmark legislation imposed 2

3 requirements on employer sponsored retirement plans under both tax and labor laws. It required such things as holding plan assets in trust for the exclusive benefit of participants, maximum vesting schedules and many of the rules we accept as standard in retirement plans today. Plans sponsored by state and local governments and certain church organizations are not subject to most provisions of ERISA, although many states have used ERISA as a model in developing laws that apply to retirement plans in their states. These ERISA-like state statutes generally do not apply to public school 403(b) plans. 13. Fiduciary Responsibility: The legal obligation that requires anyone who provides services to others to make decisions that are in the sole interest of the person to whom the duty is owed. Investment advisors and plan sponsors of ERISA plans (which generally do not include public school 403(b) plan sponsors) are two common examples of parties with Fiduciary Responsibility. 14. Fixed Annuity: An investment vehicle offered by an insurance company in which the company (a) guarantees the return of principal in the policy plus a guaranteed interest rate and (b) typically pays interest at a rate declared periodically (generally, annually) based on current company returns. An insurance company generally bases its interest rate on the expected earnings of the general assets of the company. Fixed annuities typically do not have administrative fees. The insurance company expects to make a profit and cover its expenses on the difference between what the investments earn and what is paid to policyholders. However, the declared rates (and guaranteed rates) are credited regardless of whether the company achieves its expected investment returns. Many policies have Surrender Charges to withdraw funds (see the Surrender Charges definition). 15. Guaranteed Period Annuity: Guaranteed Period Annuity (Also referred to as a Period Certain Annuity): An annuity payment made payable for a guaranteed minimum period of time. The guaranteed period may be combined with a life annuity under which the annuity payment is guaranteed to be paid to the retiree throughout their lifetime. Under the guaranteed period option if the retiree dies before the guaranteed number of payments have been made to the beneficiary, the beneficiary will receive the remaining payments. 16. High Yield Bonds: High Yield Bond Portfolios concentrate on lower-quality bonds, which are riskier than those of higher-quality companies. These portfolios generally offer higher yields than other types of portfolios, but they are also more vulnerable to economic and credit risk. These portfolios generally invest in U.S. high-income debt securities where at least 65% or more of bond assets are not rated or are rated by a major agency such as Standard & Poor's or Moody's at the level of BB and below. 17. Individual Retirement Account (IRA): A retirement account available to most taxpayers. An IRA can have a much wider range of investment options than most employer sponsored plans. No loans are permitted and annual contribution limits are much lower than payroll deduction retirement plans. Distributions from an IRA prior to age 59 ½ generally are subject to an additional 10% early withdrawal tax for premature distributions. 18. Information Sharing Agreement: An agreement between an employer that sponsors a 403(b) plan and a vendor to share certain information in order to assure compliance of plan transactions with federal tax rules by coordinating across multiple accounts and/or providers. 3

4 19. Investment Policy Statement (IPS): The Investment Policy Statement is an important document that acts as the business plan for the portfolio. It outlines the general rules that the investment advisor will follow to achieve the client's desired outcome for the portfolio. Minimum components of an IPS should include: The duties and responsibilities of all parties, diversification and rebalancing guidelines, due diligence criteria to be used in selecting investments, monitoring criteria for investment options and service vendors, and procedures for controlling and accounting for investment expenses. It is important to note that although an IPS is common with many types of plans, many if not most 403(b) plans of governmental employers do not have an IPS. 20. Mortality & Expense Charge (M & E): An annual fee charged by an insurance company in a Variable Annuity contract. This fee covers the cost of providing certain guarantees under the contract, which can include guaranteed death benefits and guaranteed annuity rates, as well as guarantees that the rate of the charge cannot be increased for the life of the contract. 21. Non-creditable Compensation: Compensation received by a participant in a defined benefit pension plan that is not counted towards salary for the purpose of the pension benefit calculation. 22. Peer Group: In an effort to distinguish funds by what they own, as well as their prospectus objectives and styles, Morningstar developed Categories. While the prospectus objective identifies a fund's investment goals based on the working in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years). 23. Plan Administrative Fees: The fees charged for administrative services to a plan. The amount of the fee may be determined by several factors, including the types and levels of services provided, as well as the type of organization providing the services. For example, such a fee may be higher for services from a TPA that is not otherwise affiliated with an investment provider. These fees can be paid by the employer, plan participants or vendors. Some vendors also provide TPA services in return for the ability to offer their investment products in the plan. 24. Plan Document (or Written Plan): A 403(b) plan of a governmental plan sponsor must be maintained under a written plan that meets the requirements of 1.403(b)-3(b)(3). The 403(b) written plan can be a single document or a collection of documents which together satisfy the relevant requirements. Additionally, the plan sponsor must assure that the plan provisions are followed in operating the plan. An eligible 457(b) plan is a written plan established and maintained by an eligible employer that is maintained, in both form and operation, in accordance with the requirements of through An eligible 457(b) plan must contain all the material terms and conditions for benefits under the plan. Both types of plans may contain certain optional features not required for plan eligibility, such as distributions for financial hardships/unforeseeable emergencies, loans, plan-to-plan transfers, additional deferral elections, acceptance of rollovers to the plan, and distributions of smaller accounts to eligible participants. 25. Plan Sponsor: Under ERISA, plan sponsor is defined as (i) the employer in the case of an employee benefit plan established or maintained by a single employer, (ii) the employee organization in the case of a plan established or maintained by an employee organization, or (iii) 4

5 in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. 26. Qualified domestic relations order (QDRO): A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan. The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. A QDRO may not award an amount or form of benefit that is not available under the plan. 27. Required Minimum Distribution (RMD): Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired. Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs. When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner s death, or (2) over the life of the beneficiary starting no later than one year following the owner s death. 28. Retirement Gap: The difference between an individual s desired or target retirement income and the retirement income he or she is expected to have when all sources combined (retirement plans, savings, Social Security, etc.) are taken into account. This difference, or a percentage of it, is what retirement and financial planners typically use as a replacement goal in determining the amount of retirement savings an individual needs to have in order to achieve their income objective. This difference can grow over time as inflation raises the cost of living. 29. Revenue Procedure: A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses. 30. Revenue Ruling: A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related laws and regulations. It is the explanation by the IRS on how the to apply the law to a set of facts. Revenue rulings are published in the Internal Revenue Bulletin. 31. Roth Retirement Accounts (401(k), 403(b), 457(b), IRA): A Roth retirement account has different tax treatment from traditional pre-tax accounts. Retirement accounts historically have tax sheltered contributions and are tax deferred until withdrawal. A Roth account contribution is 5

6 not tax sheltered, but the earnings are never taxed if the account is operated in accordance with federal tax rules (i.e. contributions are taxed when made) but qualifying distributions may be fully federal income tax free. 32. Sales Representative: Individuals who sell annuity and other investment products to plan participants on a group or individual basis. Other terms for these individuals are marketing representative, representative and practitioner. The level and scope of services offered by representatives varies among individuals and vendors. 33. Share Class: A designation applied to a specified type of security such as common stock or mutual fund units. Companies that have more than one class of common stock usually identify a given class with alphabetic markers, such as "Class A" shares and "Class B" shares. Different share classes within the same entity typically confer different rights on their owners. 34. The SPARK Institute: A trade association whose members include most of the largest firms that provide record keeping and investment services to employer-sponsored retirement plans. A key service that they provide is developing standard data file formats that employers, vendors and TPAs can use to electronically share information for plan administration and compliance purposes. Their 403(b) plans information sharing data standards are widely used in the industry. 35. Special Catch Up Contributions: In one or more of the last three tax years before the tax year in which a participant reaches Normal Retirement Age as defined in the plan document, the participant may be able to increase contributions by up to twice the otherwise applicable deferral limit. Catch up contributions are only allowed if the participant did not maximize contributions in prior years under the employer s plan. 36. Sub Transfer Agent Fees (Sub TA): fees by mutual funds or affiliates to companies for servicing investor accounts. In the context of retirement plans, these are usually paid to a Third Party Administrator (TPA), insurance company, bank, trust company or other financial institution. The theory is that the institution receiving the fees does work that the mutual fund would otherwise have to perform. 37. Surrender Charge: A charge imposed by an insurance company to withdraw funds from an insurance policy or annuity contract. A surrender charge typically will decrease to zero over a specified period. The surrender charge protects an insurance company from a policy holder removing funds prior to the company having recovered its initial expenses in setting up the policy. 38. Tax Deferral: Refers to the delayed taxation of amounts which, without the deferral, would be currently taxable. Most retirement plan contributions (other than Roth contributions) as well as earnings on those contributions within the plan, are tax deferred until they are distributed. 39. Tax Sheltered: See Tax Deferral. 40. Third Party Administrator (TPA): An organization that administers a retirement plan for an employer on the employer s behalf. The scope of the administrative services and the limitations on the TPA s role are typically defined by a contract between the employer and the TPA. Some TPA s derive their income solely from administrative fees, services while some provide such services for reduced or no fees where they offer products or services to the plan or to another 6

7 plan of the employer. 41. Unforeseeable Emergencies: Pursuant to Treasury Regulation (c)(2), An unforeseeable emergency must be defined in the plan as a severe financial hardship of the participant or beneficiary resulting from an illness or accident of the participant or beneficiary, the participant's or beneficiary's spouse, or the participant's or beneficiary's dependent; loss of the participant's or beneficiary's property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner's insurance, such as damage that is the result of a natural disaster); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary. For example, the imminent foreclosure of or eviction from the participant's or beneficiary's primary residence may constitute an unforeseeable emergency. In addition, the need to pay for medical expenses, including non-refundable deductibles, as well as for the cost of prescription drug medication, may constitute an unforeseeable emergency. Finally, the need to pay for the funeral expenses of a spouse or a dependent may also constitute an unforeseeable emergency. 42. Vendor: Term typically used for insurance and other financial institutions that offer annuity and other investment products to participants in a 403(b) plan. 43. Vendor Agreement: An agreement between a 403(b) plan sponsor and/or the sponsor s TPA and a vendor that defines the relationship and obligations of the parties in the administration of the plan. A Vendor Agreement may be or include an information sharing agreement. For other important terms please see the Sample Glossary Of Investment-Related Terms For Disclosures To Retirement Plan Participants (Version 1.01, dated April 26, 2012) developed by The SPARK Institute and the Investment Company Institute, and endorsed by several other organizations including NAGDCA as of 8/27/12. sample_glossary_for_disclosure_terms.pdf Prepared by: NAGDCA s 403(b) Task Force and Executive Board 7