Below is a sampling of the most common retirement investment plan terms to help you talk the talk—and, more importantly, feel more confident about your retirement savings.
Asset allocation: The division of funds among several different investment categories—stocks, bonds and cash alternatives—to create a portfolio. The practice of investing in multiple asset classes and securities with different risk characteristics to reduce the risk of owning any single investment is called diversification.
Asset class: Categories that are applied to securities or investments based on their similar characteristics or behavior. Three common asset classes are equities (e.g., stocks), fixed income (e.g., bonds) and cash alternatives or equivalents (e.g., money market funds).
Basis point: One hundredth of 1%, or 0.01%; e.g., 20 basis points equal 0.20%. Investment expenses, interest rates and yield differences among bonds are often expressed in basis points.
Collective investment trust (CIT): Investments created by banks or trust companies that pool institutional retirement plan assets. They are governed by rules and regulations that apply to banks and trust companies instead of being registered with the Securities and Exchange Commission (SEC).
Dollar cost averaging: A long-term investing strategy in which an investor contributes the same amount of money to an investment account on a regular schedule.
Exchange-traded fund (ETF): An investment that, like stocks, trades throughout the day on an exchange.
Expense ratio: The cost of operating an investment, expressed as a percentage of its assets or in basis points. These are expenses the investor pays through a reduction in the investment’s rate of return.
Index: A benchmark against which to evaluate the overall performance of investments within a designated category.
Index fund: A type of investment fund whose investment objective is to achieve the same return as a particular stock or bond market index. The fund will attempt to achieve its investment objective primarily by investing in the securities—i.e., stocks or bonds—of companies included in a selected index.
Mutual fund: An investment registered with the SEC that, with the pooled funds of many investors, invests in a variety of securities—including stocks, bonds or other mutual funds—to meet a specified financial goal. Mutual funds can have actively managed portfolios, where a professional investment adviser creates a unique mix of investments to meet a particular investment objective, or passively managed portfolios, in which the adviser seeks to parallel the performance of a selected benchmark or index.
Penalty: A fine assessed by the Internal Revenue Service (IRS) when an employee takes a distribution outside the established parameters for distribution.
Qualified default investment alternative (QDIA): Created by the Pension Protection Act (PPA) of 2006, a default investment that can provide a plan sponsor with fiduciary protection for the assets in the fund, provided that the plan sponsor meets certain notice requirements.
Rebalance: The process of moving money from one type of investment to another, to maintain a desired asset allocation.
Return: The gain or loss on an investment. A positive return indicates a gain, and a negative return indicates a loss.
Stable value fund: An investment fund with holdings that aim to preserve principal and provide consistent returns over time. Stable value funds can be collective investment funds offered by banks or trust companies, or interest-bearing contracts purchased from banks and insurance companies.
Target-date fund (TDF), aka lifecycle fund: A fund that sets its asset allocation based on a long-term strategy of appreciation and capital preservation according to an investor’s age or target retirement date. The asset allocation changes over time, generally becoming more focused on income or conservation of principal as the retirement date approaches. The change in a target-date fund’s asset-allocation mix to shift over time from a focus on growth to income is called the glide path.
Target-risk fund, aka lifestyle fund or risk-based fund: A fund that maintains a predetermined asset mix according to an investor’s desired risk level, generally described as “conservative,” “moderate” or “aggressive.”
Taxable income: The amount of income that the IRS taxes; this income can be far lower than gross income because the IRS allows pretax contributions to some investment accounts and pretax payment of some expenses.
Volatility: The amount and frequency of investments’ rise and fall in value within a specified time period.
Judy Faust Hartnett
editors@plansponsor.com