"Reams of statistics prove that most of the fund industry's stock pickers fail to beat the market." Jonathan Clements, Wall Street Journal

Glossary

40l(k) Plan

A type of defined contribution plan in which employees may elect to make a pre-tax contribution to an employer-sponsored plan in lieu of receiving taxable income.

403(b) Plan

The mechanism for employees of certain not-for-profit organizations to elect to defer compensation in a qualified retirement plan.

404(c)

A section of ERISA dealing with participant self-direction. The section has garnered much interest as a means for plan sponsors to avoid or reduce fiduciary liability for participant investment choices in a participant-directed investment plan. In order to qualify, the plan must comply with specific requirements regarding information about investment options, number and type of investment options, as well as an ability to move balances between those options on a reasonably frequent basis.

457 Plan

Allows state and local government and tax exempt organizations to set up deferred compensation plans similar to a 401(k). This plan is not subject to ERISA. The funds belong to the employer, subject to the claims of the employer's general creditors.

Academic Research

Unbiased studies and articles published by finance professors and graduate students from the nation's premier graduate schools of business, including the University of Chicago, Wharton, Yale, Princeton, and Stanford.

Accrued Benefit

A benefit earned by an employee through participation in a plan. In a defined contribution plan, it is the balance in the individual account at a particular time. For defined benefit plans, it generally refers to the benefit that will be provided when the participant reaches normal retirement age, as defined by the plan document.

Active Participants

Eligible individuals who have hours of service and make contributions to a retirement plan.

Actual Deferral Percentage

A nondiscrimination test applied to elective contributions (most commonly employee pre-tax contributions) to determine if those contributions discriminate in favor of highly compensated employees.

Administrator / Plan Administrator

The person or entity charged with the responsibility of administering the terms (provisions) of the plan.

Affiliated Service Group

A group of two or more related organizations that are treated, for various employee benefit requirements, as a single employer. Employees of these affiliates are treated as though they are employed by a single employer to determine plan qualification.

Age-Weighted

Plan in which contributions are allocated to participants on a basis that considers both age and compensation.

Alpha (α)

The alpha coefficient measures the portion of an investment's return arising from specific (non-market) risk. It can be a positive or a negative number. Often referred to as a manager's "value added" (or "value subtracted"), alpha measures the difference between actual returns and expected performance resulting from exposure to specific risk factors.

Alternative Investments

Typically all investments other than stocks and bonds. For example; real estate, REIT's, commodities, hedge funds, convertible bonds, oil and natural gas drilling investments.

Amendment

Changes made to an existing plan.

Asset Class

A major class of investments; For example, US large stocks, international small stocks, real estate, bonds.

Average Contribution Percentage

A nondiscrimination test applied to employer matching and employee (after-tax) contributions, to determine if those contributions discriminate in favor of highly compensated employees.

Beneficial Owner

The entity which enjoys the benefits of ownership of the effected securities despite title being in the name of another entity.

Beneficiary/Beneficiaries

The person(s) to whom a share of a deceased participant's account balance is payable.

Beta (β)

The beta coefficient measures an investment's relative volatility or impact of a per-unit change in the independent variable (market) on the dependent variable (portfolio), holding all else constant. The beta of a portfolio is its covariance in relation to the market. The market portfolio has a beta coefficient of 1. A higher (lower) beta would imply more (less) volatility.

Blackout

A period of time during which participants are not allowed to make changes to their 401(k) balances. This generally occurs during a conversion to a new recordkeeper, or when significant changes are being made to the plan. The blackout gives the providers time to test and validate the new platform and/or provisions.

Book-to-Market (BtM) Ratio

The "BtM" is the ratio of a firm's book value of equity to its market value of equity. Book value of equity is determined by the firm's accountants using historic cost information. Market value of equity is determined by buyers and sellers of the stock using current information. A high (low) BtM ratio indicates that the book value per share is high (low) relative to the stock price.

	book value per share
=
	stock price

Break in Service / One-Year Break in Service

The applicable computation period during which an employee has not completed more than 500 hours of service with the employer. Generally, no service credits or vesting accumulations occur during this period.

Cafeteria Plan

A tax qualified arrangement under which participants may elect a combination of various taxable and tax-preferred forms of compensation, often including but not limited to cash, health insurance, 401(k) plan contributions, life insurance, child care, and additional vacation days. Also called a flexible benefit plan or Section 125 plan after the section of the tax code that allows for the creation of flexible benefit plans.

Carryover of Contribution

Created whenever the employer's contribution for a given year exceeded the maximum allowable deductions for that year. Allows employers to make larger contributions in earlier, more profitable years.

Carryover of Deduction

Credit that occurs when the employer's contribution for the year was less than the maximum allowable deduction of 15% covered compensation. It enables employers to take a larger tax deduction.

Cash or Deferred Arrangement

A qualified retirement plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf (i.e., they can take cash OR defer its receipt). These arrangements are sometimes referred to as 401(k) arrangements, after the section of the Internal Revenue Code that allows for-profit private companies to sponsor them. See also salary reduction plans.

Cash-Out

Distribution.

CFP® or Certified Financial Planner®

The CFP®, CERTIFIED FINANCIAL PLANNER™ and certification marks are financial planning credentials awarded by Certified Financial Planner Board of Standards Inc. (CFP Board).

CFA® or Chartered Financial Analyst™

This designation is awarded by the Association for Investment Management and Research (AIMR®) to experienced financial analysts who successfully pass three annual examinations covering economics, financial accounting, portfolio management, securities analysis and ethics, have approved work experience and meet other requirements. CFA charterholders are annually required to affirm their commitment to high ethical standards.

Cliff Vesting

Full (100%) vesting after a specified length of service with no vesting (0%) prior to that time.

Coefficient of Determination (R²)

The coefficient of determination, which ranges between 0 and 1, indicates the goodness of fit of a regression model. It shows the proportion of the total variance of the dependent variable explained by the regression model. An R2 of 1 indicates that the model explains all of the variation of the dependent variable. An R2 of 0 indicates that the model explains none of the dependent variable's variance. In many applications, a higher R2 is preferred to a lower one.

	total variation - unexplained variation
=
	total variation

Compensation

The amount of a participant's taxable and nontaxable wages that is considered for purposes of a certain employee benefit requirement.

Complete Discontinuance

Complete plan termination and final distribution of plan assets.

Concentrated Stock

A block of stock or options that are invested in one company and which comprise more than 5% of an individual's assets.

Conduit IRA

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.

Contribution

A payment made by an employee or employer to a qualified plan.

Convexity

Convexity is the ratio of change in duration for a given change in yield—the change in the slope of the price as a function of a change in yield (second derivative of the price function). In general, convexity increases with longer maturities and smaller coupons and yields.

Correlation Coefficient (ρ)

The correlation coefficient measures the degree to which the movements of two variables are related. It indicates how close the residuals are to the regression line and is calculated as the square root of the coefficient of determination.

	covariance_x,y		(β_x) (β_y) (σ²_market)
=		=
	(σ_x) (σ_y)		(σ_x) (σ_y)

σ_x = standard deviation of "x"
σ_y = standard deviation of "y"
β_x = beta of "x"
β_y = beta of "y"
σ²_market = variance of the market portfolio

Cost of Capital

A company issues stock (or debt) in exchange for capital to fund its operations. The investor provides this capital by purchasing shares (or bonds) in exchange for an expected return. Because the company foregoes the return on the stock or debt it issues, its cost of capital is identical to the investor's expected return.

Covariance

Covariance measures the degree to which two variables move together over time relative to their individual mean returns. It is calculated by multiplying the correlation between two variables by the standard deviation for each of the variables.
= ρ (σ_x) (σ_y)

Cross-Tested

A test for qualified plans with respect to the equivalent amount of benefits to determine that the plan does not discriminate in favor of highly compensated employees.

Current Yield

Current yield is calculated as the annual interest on a fixed income security divided by its market price.

	annual interest payment
=
	bond price

Custodial Account

An account established for the safekeeping of plan assets, but with no discretion or responsibility for managing those assets.

Decile

A decile is a portion within a whole that has been divided into ten equal parts. For example, the population of issues on the NYSE can be broken into ten deciles according to market capitalization, each containing the same number of stocks.

Deduction

Something that may be subtracted from taxable income.

Deferred Compensation

The portion of the participant's total compensation which has been contributed to the plan.

Defined Benefit

A defined benefit plan pays benefits based on a specific (defined) formula. The benefit is defined by the terms of the plan. In theory, what you "know" at a given point is the benefits due, based on that formula (though that may be easier said than done). Simplistically, it is what has traditionally been called a "pension" plan. The benefit is generally not expressed as a specific amount, but as a formula used to calculate that benefit. Typically, benefits paid will depend on three factors: age, service, and compensation. Benefits paid may be Social Security benefits, and may or may not be adjusted for subsequent cost-of-living adjustments, based on the terms of your plan. These plans consider years of service by the employee, generally providing greater benefits the longer an employee works for a particular employer.

Defined Contribution

In a defined contribution plan, the amount of the contribution is defined by the plan rather than the benefit. In other words, you "know" how much goes into the plan (or at least the formula for determining it), not the benefits that may eventually be paid out. A defined contribution plan has individual accounts for each participant in the plan, another key difference from defined benefit plans. Also, both employer and/or employees may contribute to a DC plan (employee contributions to defined benefit plans are rare). These contributions are invested at the direction of the employer (as in most profit-sharing plans), the employee (as in 401(k) plans) or according to the plan itself (employee stock ownership plans, or ESOPs). The employee benefits directly from any investment gains in the individual account—or suffers from any investment loss. There is no "insurance" for these benefits, as there is with defined benefit DB plans.

Definitely Determinable

A pension plan must provide for the payment of definitely determinable benefits to employees upon retirement or over a period of years after their retirement, or to their beneficiaries—benefits to be determined without regard to the employer's profits. Benefits actually payable need not be definitely determinable provided the contributions can be determined actuarially on the basis of definitely determinable benefits.

Degrees of Freedom

The degrees of freedom is the number of values in the calculation of a statistic that are free to vary—the total number of observations in the sample minus the number of samples.

Department of Labor

The nontax (regulatory and administrative) provisions of ERISA are administered by the Department of Labor. The DoL issues opinion letters and other pronouncements, and requires certain information forms to be filed.

Dependent Variable

The dependent variable is a response variable (i.e., expected return) whose behavior is to be measured as a result of the manipulation of independent variables in an experiment. Ideally, the dependent variable should be reliable, sensitive, and easy to measure.

Determination Letter

Letter issued by the IRS District Director's office determining that a plan submitted to it meets (or does not meet) the requirements for qualification.

Direct Transfer

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.

Disqualified, Disqualify

Loss of qualified (tax-favored) status by a plan, generally resulting from operation of the plan in a manner that is contrary to the provisions of the plan or that discriminates against rank-and-file employees. A disqualified plan must disgorge its assets, creating tax consequences for both the sponsoring company and participants.

Disqualified Person

A person who, because of his or her relationship with the plan (e.g., as a fiduciary, provider of services, or the plan sponsor) is prohibited from entering into certain transactions with the plan.

Diversification

The process of selecting many different stocks within one asset class, and, in our opinion, many different asset classes that are not highly correlated to each other, in order to reduce investment risk.

Dividend Yield

Dividend yield is the contribution to annual total return that an investor earns by receiving dividends. It is determined by dividing the dividend per share by the current stock price.

	dividend per share
=
	stock price

Duration

Duration measures bond price volatility by calculating the weighted average term-to-maturity of a bond's cash flows, where the weights are the present value of each cash flow as a percentage of the bond's full price. Duration rises with maturity, falls with the frequency of coupon payments, and falls as current yields rise (higher yields reduce the present value of the cash flows).

	σ [(t) (PV_cf)]
(approx.) =
	bond price

t = year of cash flow
PV_cf = present value of cash flow

Early Distribution Penalty

A 10% penalty assessed on distributions received from a qualified plan before certain conditions are met (generally before the participant attains age 59 1/2.

Early Retirement

Provision made in a retirement plan to allow employees who have met certain conditions, such as length of service and specified age, to retire prior to their regularly scheduled retirement age. In general, in case of such early retirement, the benefits which a participant can expect to receive from the plan will be less than those offered at full retirement age.

Earnings-to-Book (EtB) Ratio

"EtB" is the ratio of a firm's current (or predicted) earnings per share to the book value per share of its common stock. Because book equity is relatively stable, division of earnings by book equity emphasizes changes in earnings through time. A low (high) EtB ratio indicates a firm with low (high) earnings relative to book value.

	earnings per share
=
	book value per share

Efficient Market Theory

"EMT" is the theory postulating that market prices reflect the knowledge and expectations of all investors. It asserts that any new development is instantaneously priced into a security, thus making it impossible to beat the market consistently.

Elective Deferral, Salary Reduction

A contribution made to a 401(k) plan by the employer on an employee's behalf pursuant to the employee's cash-or-deferred election.

Eligibility

Any employee who is eligible to become a participant in a plan pursuant to the terms of the plan document.

Employee Retirement Income Security Act of 1974 (ERISA)

A federal law governing the management of employee benefit plans. The act's regulatory reach extends to most aspects of employee benefit trust administration.

Employee Stock Ownership Plan (ESOP)

A profit-sharing, stock bonus or money purchase pension plan in which the plan assets must be invested primarily in stock of the employer (company stock). An ESOP may borrow from the employer, or use the employer's credit to acquire company stock (a leveraged ESOP).

Entry Date

The date on which an employee joins the plan.

Excess Aggregate Contribution

The excess of the total amount of employee and matching contributions made on behalf of highly compensated employees (HCEs) in a plan year over the maximum allowed under the ACP test.

Excess Contribution

The excess of the elective contributions made to a 401(k) plan on behalf of highly compensated employees (HCEs) for the plan year in excess of the maximum allowed under the ADP test.

Excess Deferral

An employee's elective contributions for the taxable year in excess of the current deferral limit (originally $7,000, indexed for inflation—now $10,000).

Excess Retirement Accumulation

A tax of 15% imposed on large account balances at the point of distribution.

Exclusive Benefit Rule

The requirement that plan fiduciaries must discharge their duties solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and paying administrative expenses.

Expected Return

"E(R)" is the mean value of the probability distribution of possible returns.

	end value - beginning value + dividend
(estimate) =
	beginning value

Factor Loading

Factor loading is an asset's sensitivity to an economically important return.

Fee-Only™

Abacus Wealth Partners, LLC is at all times Fee-Only™. We do not offer "fee-based" alternatives and commission-based services to the same clients as most financial advisors do. Fee-Only™ means exactly what it says: Only fees ... no commissions ... ever.

Fiduciary

An obligation of a person or trust institution to act in the best interests of the client on issues within the scope of their relationship.

Fiduciary Duty/Fiduciary Duties

Responsibility to act with loyalty and prudence, to diversify plan assets, and act in accordance with plan documents.

Fiduciary Oath

An Abacus Wealth Partners advisor shall exercise his or her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest which will or reasonably may compromise the impartiality or independence of the advisor.

Abacus Wealth Partners, LLC, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client's business.

Flexible Benefit Plan

A qualified arrangement under which participants may elect a combination of various taxable and tax-preferred forms of compensation, often including but not limited to cash, health insurance, 401(k) plan contributions, life insurance, child care, and additional vacation days. Also called a cafeteria plan.

Flexible Spending Account

A type of flexible benefit plan that allows employees to set money aside on a pretax basis for qualified unreimbursed medical or dependent care expenses. These accounts may exist either within a full flexible benefit plan or separately as a stand-alone plan. They can be funded by salary reduction arrangements, employer contributions, or both. Employees must determine how much they wish to contribute to the account in advance and forfeit any unused dollars at the end of the year.

Forfeit, Forfeiture

The benefits that a participant loses if he or she terminates employment before becoming eligible for full retirement benefits under the plan. The difference between total benefit and total vested benefit. For example, a participant who leaves employment when 60% vested will lose the remaining 40%.

Form 5300

Form used to apply for an Employee Benefit Plan determination letter.

Form 5307

Form filed with the IRS for employers who adopt a standard plan document of a service provider (also known as a master plan, prototype, regional prototype, or volume submitter plans) filing for a determination letter on the effect of a minor plan amendment.

Form 5500

Form which must be filed with the IRS for each year in which a qualified plan has assets. Form 5500 is filed for plans with 100 or more participants, Form 5500 C or R for those plans with less than 100 participants, and Form 5500 EZ for qualified plans with less than 2 participants. Plans that qualify for Form 5500 C/R must file 5500 Form C for the first year, and every three years thereafter. In intervening years those plans may file Form 5500-R.

Frozen Plan

A qualified plan that continues to exist even though employer contributions have been discontinued and benefits are no longer accrued by participants.

Government Plan

A plan established for a state or local government, including a state, a political subdivision of a state, or any agency or instrumentality of either of them.

Graduated Vesting

A vesting schedule that provides for increasing levels of vesting with increasing length of service, until full vesting is achieved. (See vesting.)

Hardship, Financial Hardship

An in-service withdrawal from a retirement plan due to a participant's immediate and heavy financial need that cannot be satisfied from other resources. The conditions for a hardship withdrawal can be determined through either a safe harbor or a facts-and-circumstances method.

Hedge

To use financial instruments to mitigate the risk of a particular investment. For example, one could hedge one's exposure to an employer's stock by buying a put option on that stock.

Highly Compensated Employee (HCE)

An employee who, during the year or the preceding year, is (or was) (1) a 5% owner or (2) receiving compensation in excess of $80,000 (adjusted for cost-of-living increases) and was a member of the top-paid group of employees (if elected by the employer).

Hour of Service

Each hour for which an employee is paid or entitled to payment for the performance of duties for the employer.

HR-10, HR10, Keogh

A qualified retirement plan that covers a self-employed person (though other employees might also be covered). May include either a defined contribution or a defined benefit plan.

Incidental (Benefit)

Any benefit of a retirement plan which is not specifically spelled out in the plan as a primary retirement benefit; also referred to as a fringe benefit. Special rules apply to these benefits to prevent discrimination with regard to incidental benefits.

Independent Variable

An independent variable is a factor whose effects are to be studied and manipulated in an experiment (i.e., exposure to market, size, and/or value risk).

Individually Designed Plan

An individually designed (or custom-designed) retirement plan is tailored to meet particular needs. It is based on a legal document drafted specifically to conform with the employer specifications, unlike a prototype plan that only allows for customization within a fixed set of choices.

Individual Retirement Account (IRA)

An IRA is a nonforfeitable trust or custodial account established for the exclusive benefit of an individual and the individual's beneficiaries. The trustee (or custodian) must be a bank, thrift institution, insurance company, brokerage firm, or other person who demonstrates to the IRS that such person will administer the account in a manner consistent with the requirements of the law. No part of the funds may be invested in life insurance contracts. Assets of the account cannot be commingled with other property except if there is a common trust fund or common investment fund.

In-Service Distribution

Distribution of retirement benefits received to a plan participant prior to retirement (and, generally, while still employed). Most in-service distributions received before age 59-1/2 will incur an additional 10% tax that applies to distributions from qualified plans, tax-sheltered annuities, and individual retirement accounts.

Institutional

Investments that are not available to the general public. Institutional funds are designed for investors with very large portfolios and very disciplined philosophies in order to minimize trading costs and taxes. Most financial advisors do not have access to the quality of institutional funds that Abacus advisors do.

Integration

A feature of some qualified retirement plans that coordinates plan benefits or contributions with Social Security. Social Security benefits are progressive, i.e., they replace a greater proportion of pre-retirement earnings for lower earners than for higher earners. To compensate for this benefit tilt, plans may provide proportionately (as a percentage of compensation) higher pension benefits or contributions to higher-paid participants than to lower-paid participants, subject to certain limits. Since the Tax Reform Act of 1986 (TRA 86), integration is referred to as permitted disparity.

Interested Parties

Generally, all employees at the time the employer applies for a determination letter for the plan. The Internal Revenue Service requires that interested parties be notified when the application is made.

Investment Adviser

Individual or entity who provides investment advice for a fee. Registered Investment Advisers must register with the SEC and abide by the rules of the Investment Advisers Act.

Investment Manager

Individual who is responsible for the selection and allocation of investment securities.

Investment Policy

A formal statement outlining the broad investment objectives of a plan.

IRC, Code, Internal Revenue Code

Internal Revenue Code of 1986, the basic Federal tax law.

Loan

If the plan allows, a participant may take a loan from the plan, using the vested account balance as collateral. These loans may allow a participant to repay the account with a stipulated interest rate, or repayments may be credited to the general assets of the plan. Qualified loans normally provide favorable interest rates for participants (prime + a percent or two), but have many restrictions regarding size and amortization which prevent the loan proceeds from being considered as current income or as an in-service withdrawal.

Lump-Sum Distribution

Distribution from a qualified retirement plan of a participant's vested balance within one taxable year. To be considered a qualified lump-sum distribution, it must be made because of the employee's death, attainment of age 59-1/2, separation from service, or disability (if self-employed).

Market Capitalization

Market capitalization is the value of a company as determined by the market price of its issues and outstanding common stock. It is calculated as the product of market price and shares outstanding.

= (stock price) x (shares outstanding)

Market Timing

The process of shifting portfolio weightings between asset classes based on predictions about future market performance. Also known as "Tactical Asset Allocation".

Master Plan

A retirement plan sponsored by a financial institution such as an insurance company, bank, mutual fund, or stock brokerage firm, that may be adopted by an employer by executing ("adopting") a participation agreement.

Mean (average)

This measure of central tendency indicates the point at which a population of observations is measured. Equals the sum of the observations' values, divided by the number of observations.

	σ (X)
=
	N

X = observation value
N = number of observations

Median

This measure of central tendency is used to indicate the point at which a population of observations is measured. It is the point in the distribution at which 50% of the observations will have values greater than or equal to the median, and 50% less than or equal to the median.

Minimum Additional Investment

Minimum incremental capital allocation allowed to an existing investor.

Minimum Benefit (Under Top-Heavy Plan)

Under a top-heavy defined benefit plan, the annual requirement benefit of a non-key employee must be not less than 3% of compensation.

Minimum Coverage

Minimum number of employees that must be covered by a plan before it can be tax-qualified. Plan must satisfy either the ratio percentage test or the average benefit test.

Minimum Funding

Minimum amount that must be contributed by an employer that has a defined benefit, money purchase, or target benefit pension plan. If the employer fails to meet these minimum standards, in the absence of a waiver from the IRS, an excise tax will be imposed on the amount of the deficiency.

Minimum Participation

Must be met by employer in order for the plan to be qualified; plan must benefit at least the lesser of (1) 50 employees, or (2) 40% of all employees. Minimum participation requirements cannot be satisfied by combining plans of an employer.

Mode

Mode is the measure of central tendency that indicates the point(s) at which a population of observations is measured. It is the value in a distribution that occurs most frequently.

Money Purchase

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.

Monte Carlo Analysis

The process of using simulation software to model multiple future economic scenarios to determine a client's probability of success in reaching his or her goals. Monte Carlo analysis is generally thought to be much more accurate than a traditional, linear rate of return analysis. See our Monte Carlo Appendix.

Mortality

Rates based on life expectancy formulas used by defined benefit actuaries to determine funding requirements based on the formulas in the plan and the demographics of the plan participants.

Multi-Employer Plan

A pension plan, maintained under a collective bargaining agreement, that covers the employees of more than one employer. Generally, the various employers are not financially related but rather are engaged in the same industry.

Multiple Employer Plan

A qualified retirement plan to which more than one employer contributes and that is not the subject of a collective bargaining agreement.

Named Fiduciary

A fiduciary named in the plan instrument or identified through a procedure set forth in the plan. The named fiduciary has authority to designate others to carry out fiduciary responsibilities.

Nominal Yield

Nominal yield is calculated as the annual dollar amount of income received from a fixed income security divided by the issue's par value (usually $1000). This yield is also called the coupon rate.

	annual interest payment
=
	par value

Nondeductible

Unable to be deducted for tax purposes; nondeductible contributions are defined as the sum of (1) amounts contributed by an employer to a qualified retirement plan for a taxable year in excess of the amount allowable as a deduction for that taxable year, and (2) the unapplied amounts from the preceding taxable year.

Nondiscrimination

A retirement plan is a qualified plan only if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees. Three requirements must be met: (1) contributions or benefits provided in the plan must be nondiscriminatory in amount; (2) benefits, rights, and features provided under the plan must be available to participants in a nondiscriminatory manner; and (3) the effect of plan amendments and of plan terminations must be nondiscriminatory.

Nonelective Contributions

A contribution to a cash-or-deferred arrangement (CODA) other than an elective deferral. The latter is a contribution that the employee could have elected to receive as cash, but instead elected to defer receipt.

Nonforfeitable Benefits

Benefits that cannot be lost by a participant—"vested" benefits.

Non-Highly Compensated Employee (NHCE)

Any employee (either active or former) who does not fall under the definition of a highly compensated employee.

Nonperiodic Distributions

Most nonperiodic distributions fall into three main categories: lump sum distributions, eligible rollovers, and loans from retirement plans. Nonperiodic distributions normally require withholding tax unless the distribution is transferred by a direct rollover to an eligible retirement plan that permits the acceptance of rollover distributions.

Nonqualified Plan

Retirement plan that does not fall within the IRS and ERISA guidelines established for a plan to be qualified for tax purposes.

Nonresident Alien

Non-U.S. citizen who resides outside the United States; in some cases, inclusion of nonresident aliens in a qualified plan can cause a plan to lose its tax-qualified status.

Normal Retirement Age

Established by the individual plan, though most plans specify age 65 as the normal retirement age. Although it is possible to set the retirement age lower than 65, tax complications and potential discrimination issues arise when the retirement age is set lower than age 65.

Notice to Interested Parties

Notice given to all parties in interest regarding legal or administrative issues about which all parties in interest are required by the IRS and the DoL to have disclosure.

Notification Letter

IRS option letter which alerts retirement plans, plan sponsors, and plan administrators of potential issues that might cause a plan to lose its tax-qualified status.

Opinion Letter

Interpretive letter issued by the U.S. Department of Labor that addresses specific issues and clarifies DoL guidelines.

Optional Forms of Benefit

Distribution alternative that is available under a qualified retirement plan. Variances in optional forms of benefit may result from differences in payment schedule, timing, commencement, medium of distribution, election rights, or the portion of the benefit to which the distribution alternative applies.

Partial Termination

Reducing benefits or making participation requirements less liberal, although not amounting to a complete termination of the plan, may be considered a partial termination, resulting in the vesting of accrued benefits for at least part of the plan.

Participant

An employee who meets the participation requirements for the plan and who is enrolled in the plan.

Participation

Taking part in a retirement plan. Most plans have participation requirements that specify which employees are eligible to participate in the plan.

Party in Interest

A party that, because of his, her, or its special relationship with the plan (e.g., as a fiduciary, provider of services, or the plan sponsor), is prohibited from entering into certain transactions with the plan.

Pension Benefit Guaranty Corporation (PBGC)

A nonprofit corporation, functioning under the jurisdiction of the Department of Labor, that is responsible for insuring pension benefits.

Pension Plan

A defined benefit plan that provides a definitely determinable annual benefit based on a formula contained in the plan document.

Periodic Distributions

Recurring payments such as an annuity that qualify for elective withholding but do not fall under the automatic withholding rules.

Permanent

Qualified plans must be established with the intent of being permanent. Plans can be amended or terminated, but the plan sponsor must prove to the IRS that the retirement plan is for the long-term benefit of its participants.

Plan

Retirement vehicle by which an employer intends to provide long-term benefits for its employees. Plans can be either defined benefit plans or defined contribution plans. In addition, plans either can be qualified or nonqualified for tax purposes.

Plan Assets

Assets held by the retirement plan for the benefit of the participants. Plan assets are to be segregated from the employer's property and held in trust be a trustee or investment manager who has the fiduciary duties of (1) composing the portfolio with regard to diversification, (2) structuring the assets so that the liquidity and current return of the portfolio are relative to the anticipated cash flow requirements of the plan, and (3) managing the assets so that the projected return of the portfolio is relative to the funding objectives of the plan.

Plan Document

The document that specifies the plan or instrument, including all amendments.

Plan Year

The 12 calendar months ending with the last day of the month specified by the employer in the Adoption Agreement, or plan document.

Population

A population is the entire collection of observations that is the focus of analysis.

Price-to-Earnings (PtE) Ratio

"PtE" is the ratio of the market price of a firm's common stock to its current (or predicted) earnings per share. A high (low) PtE ratio is often an indicator of market sentiment in the continued growth (decline) of a firm's earnings.

	stock price
=
	earnings per share

Profit-Sharing Plan

A plan or program for sharing company profits with the firm's employees. Under ERISA and the IRC, profit-sharing plans are treated as defined contribution or individual account plans. As such, an employer is under no financial obligation to provide a specific dollar amount at retirement in these plans.

Prohibited Transaction

ERISA prohibits a fiduciary from causing a plan to enter directly or indirectly into transactions, with certain persons defined as "parties-in-interest" as either buyer or seller, that would constitute a (1) sale or exchange, or leasing of any property between the plan and a party-in-interest; (2) lending of money or other extension of credit between the plan and a party-in-interest, (3) furnishing of goods, services, or facilities between the plan and a party-in-interest; (4) transfer to or use by or for the benefit of a party-in-interest of any assets of the plan; or (5) the acquisition, on behalf of the plan, of any employer security or employer real property not otherwise specifically exempted by law or regulation.

Prototype Plan

A retirement plan, sponsored by a financial institution such as an insurance company, bank, mutual fund, or stock brokerage firm, that may be adopted by an employer by executing (adopting) a participation agreement.

Prudent Man

Requires that a plan fiduciary use the "care, skill and diligence" that would be used by a reasonably prudent person familiar with "such matters." While essentially an extension of the common-law requirement of good faith in handling other people's money, it creates a "prudent expert" test that places an additional burden on the plan sponsor—to know what a person in this position of responsibility should know, rather than a reliance on the knowledge level of the general populace.

Qualified

A plan that is entitled to the tax benefits and protections of the Employee Retirement Income Security Act (ERISA). In order to be "qualified", a plan must: (1) have a written plan document, (2) be permanent, (3) communicate the provisions of the plan to eligible employees, (4) be established and operated for the exclusive benefit of plan participants or their beneficiaries, (5) have minimum participation (eligibility) standards, (6) be nondiscriminatory in coverage and contributions/benefits and (7) have minimum vesting standards. For the plan assets to be eligible for tax benefits, the Internal Revenue Code (IRC) also requires that the plan: (1) meet minimum participation, vesting and funding standards, and plan assets must be legally segregated from other assets of the sponsor, (2) must not benefit only a limited number of favored employees but must benefit employees in general in such a way as to be deemed nondiscriminatory by the IRS and (3) must provide definitely determinable benefits.

Qualified Domestic Relations Order (QDRO)

A domestic relations order that creates or recognizes the existence of an alternate payee's right or assigns an alternate payee the right to receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan, and that complies with certain special requirements. Only a spouse, former spouse, or dependent can be the alternate payee.

Qualified Joint and Survivor Annuity (QJSA)

An immediate noncashable and nontransferable annuity for the life of the participant, with a survivor annuity for the life of the participant's spouse. The amount of the survivor annuity cannot be less than 50% or more than 100% of the amount of the annuity payable during the joint lives of the participant and participant's spouse.

Qualified Matching Contribution (QMAC)

An employer may make qualified matching contributions to the plan. The amount of such qualified matching contributions shall be calculated by reference to the participant's elective deferrals as specified in the plan document. Qualified matching contributions are nonforfeitable when made, and distributable only as defined in the plan document.

Qualified Nonelective Employer Contribution (QNEC)

An employer may make special qualified nonelective contributions on behalf of non-highly compensated employees sufficient to satisfy either the ADP test or the ACP test, or both, pursuant to regulations under the Code. Allocations of qualified nonelective contributions to each non-highly compensated employee's account shall be made in accordance with the plan document.

Qualifying Employer Securities

Stock, marketable obligations or certain publicly traded partnership interests issued by an employer of employees covered by a plan of the employer or an affiliate.

Real Estate

Includes real estate investment trusts (REIT's), which are publicly traded companies that own, lend on, operate, and/or develop real estate. Also includes direct ownership real estate, in which the investor owns a particular property (or portion thereof). We typically do not count residential real estate being held for personal use in a client's asset allocation, but we do provide valuable mortgage, insurance, & tax advice with respect to one's residence(s).

Rebalancing

The process of selling certain asset classes and buying others so that the portfolio is allocated according to its target allocation. For example, if a portfolio is supposed to have 40% in bonds and 60% in stocks, but due to market moves, it is now at 30% in bonds and 70% in stocks, a rebalance would cause us to sell 10% out of stocks and buy 10% in bonds to bring it back to 60% stocks, 40% bonds. This discipline forces one to buy low and sell high, the opposite of what most investors intuitively do.

Redemption Notice Period

Required notification period of an intended redemption request. Notification is usually required in writing.

Regression

A statistical technique used to establish the relationship of a dependent variable (e.g., excess return) and one or more independent variables (e.g., exposure to market, size, and value risks). Slope coefficients measure the sensitivity of the dependent variable to changes in the independent variables. By measuring exactly how large and significant each independent variable has historically been in its relation to the dependent variable, the future value of the dependent variable can be estimated. Essentially, regression analysis attempts to measure the degree of correlation between the dependent and independent variables, thereby establishing the latter's predictive values.

Required Beginning Date

Generally refers to the date on which distributions from a plan (or IRA) must begin—the first day of April of the calendar year following the calendar year in which the participant attains age 70 1/2.

Required Minimum Distribution, 401(a)(9)

The minimum amount that must be paid each year to an employee, beginning with the required beginning date. Simplistically, the calculation of this amount is distributed based on actuarial tables. If not distributed on a timely basis, or in the correct amounts, the employee is assessed a penalty of 50% of the amount which should have been distributed.

Retirement Equity Act of 1984 (REA)

The major changes of this legislation included an expansion of the survivor-benefit requirements, allowed the assignment/alienation of benefits in a divorce proceeding (via a QDRO), and reduced the age requirement for plan participation.

Reversion of Contribution

The return of an employer contribution made based on a mistake of fact, or which would impact the plan's qualification or the contribution's deductibility.

Risk-Free Rate

The risk-free rate is the current interest rate on a default-free bond in the absence of inflation.

Risk Premium

The risk premium is the additional return an investor requires to compensate for the risk borne.

Rollover

A tax-free distribution from one retirement account to another, including individual retirement accounts.

Savings Incentive Match Plan for Employees (SIMPLE)

A simplified retirement plan, structured either as a 401(k) or as an IRA, that allows employees to make elective contributions, while requiring certain matching or nonelective contributions from the sponsoring employer. The specified rate of employer contributions obviates the requirement to perform the ADP/ACP nondiscrimination tests.

Section 125 (of IRC)

Used in a cafeteria plan to determine qualifications for a qualified retirement plan.

Section 401(a)(26)(of IRC)

Establishes the minimum coverage requirements for a participant in a qualified retirement plan.

Section 404(c) (of ERISA)

Permits participants to make independent choices from investment alternatives as to how they wish funds to be invested in a self-directed plan.

Section 412 (of IRC)

Ensures that minimum funding standards have been established for ERISA plans, and that any party with discretionary power or authority regarding the plan or plan assets must be bonded.

Section 414 (Compensation)

Provides rules for defining compensation for purposes of applying any provisions that specifically refer to section 414.

Section 415

Sets out the maximum contribution and benefit limitations of the Internal Revenue Code for qualified plans.

Self-Directed

An account where the individual participant has elected to make all investment decisions. Generally speaking, this terminology applies to any 401(k)-type arrangement where participants direct their account investments. More specifically, "self-directed brokerage accounts" are available in a growing number of 401(k) plans where a participant actually places trades directly through a broker designated by the program, permitting investment in a wider variety of securities, including individual stocks.

Self-Employed

An individual who has earned income for the taxable year, or an individual who would have had earned income but for the fact that the trade or business had no net profits for the taxable year. The self-employed individuals Tax Retirement Act of 1962 established the framework by which unincorporated small business owners and partners could set up and participate in tax-qualified pension plans popularly referred to as HR-10 (for an early version of the bill) or Keogh plans (for U.S. Rep. Eugene Keogh, sponsor of the bill). In order to be eligible to establish a Keogh plan, an unincorporated sole proprietorship or partnership must be engaged in a business with a profit motive. Both owners/partners and their self-employed common-law employees are eligible to participate. For Keogh plan purposes, a common-law employee is one for whom an employer has the right to control and direct the results of the work and how it is done.

Separation from Service

A person is separated from service when he does not receive compensation from his former employer. This typically occurs in termination or a willful separation of service.

Sharpe Ratio

The Sharpe ratio is the relative measure of a portfolio's return-to-risk ratio. It is calculated as the return above the risk-free rate divided by its standard deviation.

	TR_p - RF
=
	σ_p

TR_p = portfolio's total return
RF = risk-free rate
σ_p = portfolio's standard deviation

Simplified Employee Pension (SEP)

An individual retirement account arrangement for covered employees, subject to specific rules on contribution and eligibility. First authorized in 1979, SEPs simplify the administration and reduce the paperwork associated with many other types of pension plans. For this reason, they are especially attractive to smaller employers.

Socially Responsible Investing (SRI)

The process of aligning one's investment strategies with one's values, either through screening out investments that don't conform, or selecting investments that do conform. Shareholder activism and community lending are also forms of SRI.

Spousal Consent

A spouse's written consent for the participant-spouse to designate some other beneficiary or joint beneficiary arrangement.

Standard Deviation (σ)

Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performance, and a probability is attached to each performance. Generally speaking, the greater the degree of dispersion, the greater the risk.

= (σ²)^1/2

σ² = variance

Standard Error

The standard error measures the standard deviation of the dispersion about the regression line (least squares regression line has the smallest sum of squared errors). It is also referred to as "unsystematic variation"—the variation not explained by the regression line.

	σ
=
	(n)^1/2

σ = standard deviation
n = sample size

Stock Bonus

A defined contribution plan similar to a profit-sharing plan, except that the employer's contributions do not have to be made out of profits and benefit payments generally must be made in employer stock.

Stock Options

The right to acquire, at a set price (known as the "strike price"), during a specified time period, a specific quantity of shares in the employer's stock. Stock options can be qualified ("Incentive Stock Options") or non-qualified.

Summary Annual Report

Must be distributed to plan participants within the later of nine months after the close of the plan year or two months after the end of an IRS-granted extension to file the Form 5500 or 5500-C/R. It must contain certain financial and other information in the manner set forth in Labor Reg. Section 2520.104b-10(c)(3).

Summary of Material Modifications

A document that summarizes significant changes to a plan. It must be furnished to participants and beneficiaries, as well as with the United States Department of Labor. [ERISA Sec. 101(a) and 101(b)]

Summary Plan Description (SPD)

A simplified but comprehensive description of the plan provisions and ERISA-related material that must be provided to participants and beneficiaries, as well as the Department of Labor. Courts have held that, when the SPD and plan document are in conflict, the SPD controls. The SPD must be revised every five years if there are material modifications—and every 10 years even if not. New plans are to have an SPD available 120 days after the plan's effective date (or date of plan adoption, whichever is later). New participants should receive an SPD within 90 days of eligibility.

Suspension (of Benefits)

Benefits are no longer received. This can occur in a variety of situations including death.

T-Statistic

The "t-stat" tests whether or not a given correlation coefficient is statistically different from zero. Generally, a correlation coefficient with a t-stat of ≥1.96 or ≤-1.96 (95% confidence level) indicates that the coefficient is significantly different from zero. Said differently, at ±1.96, there is a 5% chance that the coefficient is not different from zero.

	Coefficient (eg.: B, S, or H)
=
	Standard Error

Target Benefit

A "hybrid" plan combining some of the characteristics of a defined benefit plan and a money purchase plan. A defined benefit formula is used to determine each employee's targeted retirement benefit. An acceptable actuarial cost method, along with acceptable assumptions, is used to determine a contribution for each employee assumed to be sufficient to provide the targeted benefit. At this point, the plan becomes defined contribution in operation, with individual accounts established for employees and all investment gains and losses are credited to their accounts. Ultimately, retirement benefits will be determined by actual account balances. For most tax law purposes, including Section 415 limits, a target benefit plan is treated as a defined contribution plan. Also, it is not subject to the plan termination insurance provisions of ERISA.

Taxable Wage Base

With respect to any year, the maximum amount of earnings which may be considered wages under Section 3121(a)(1) of the internal Revenue Code.

Tax-Deferred Annuity, Tax-Sheltered Annuity

Also known as 403(b) annuities. This is the mechanism for employees of certain not-for-profit organizations to elect to defer compensation in a qualified retirement plan.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

This legislation lowered limits on contributions and benefits for corporate plans; outlined situations where certain loans from a plan could be treated as distributions; and added "top-heavy" plan requirements. It also introduced the notion of voluntary withholding of taxes on distributions from qualified plans.

Termination

A person who has been a participant, but whose employment has been terminated other than by death, total and permanent disability or retirement.

Third-Party Administrator (TPA)

Specialized plan administration firms that generally act as an extension of the plan sponsor's duties.

Top Hat

Plans for highly compensated individuals and executives not covered by the PBGC.

Top-Heavy

A plan that primarily benefits key employees, generally when the value of accrued benefits for "key" employees is more than 60% of the value of total accrued benefits for the plan. If a plan is found to be top-heavy, special remedies must be applied, including:

•	The benefit accrual for nonkey employees under a defined benefit plan must be at least 2% of pay for up to 10 years.
•	The contributions made for nonkey employees under a defined contribution plan must be at least 3% of pay.
•	The section 415 limits can be further reduced unless special conditions are met.
•	Special and more rapid vesting requirements will apply.

Top-Paid Group (As Used in HCE Definition)

Generally, the top 20% of employees who performed services for the employer during the applicable year, ranked according to the amount of "415 Compensation" received from the employer during such year.

Trustee

The individual/institution holding legal title to the trust property. The person or entity named in the trust document and any successors in interest with fiduciary responsibilities as named in the trust document.

Variance (σ²)

Variance measures the dispersion of a return distribution. It is the sum of the squares of a return's deviation from the mean, divided by n. The value will always be ≥ 0, with larger values corresponding to data that is more spread out.

	σ (X - μ)²
=
	N

X = observation value
μ = population mean
N = number of observations

Vesting, Vested, Vesting Schedule

Generally, the nonforfeitable portion of any account maintained on behalf of a participant. Upon satisfying the participation requirements, further conditions must be met for the participant to become entitled to receive a benefit—that is, to have a vested right to the benefits.

Volatility

The variability of a portfolio's returns from one period to the next. Typically, a more volatile portfolio will decline more during bear markets and increase more during bull markets. Volatility is expressed mathematically by the standard deviation. Reducing portfolio volatility can be positive in two ways: 1) it makes the pain of a market decline less, and 2) it will actually cause wealth to grow faster than in a higher volatility portfolio with the same mean rate of return.

Voluntary / Employee Contribution

A provision for voluntary employee contributions is an optional feature included in some thrift plans. This provision provides a means for the employee to make contributions to the plan on an "after-tax" basis, while allowing earnings on those contributions to accumulate on a tax-deferred basis. Voluntary employee contributions normally are accounted for separately.

Withholding

The process of taking money out of a taxable distribution as a prepayment of income taxes due on the event.

Year of Service (Generally)

The computation period of 12 consecutive months, herein set forth, and during which an employee has completed at least 1000 hours of service.

Yield to Maturity

The "YtM" is the rate of return if a long-term, interest-bearing security is held to its maturity date.

	interest + (-) capital gain (loss)
=
	average price*

		purchase price + redemption
*average price	=
		2