B

balanced fund A balanced fund seeks to provide a combination of growth, income, and capital protection by investing in a mix of stocks, bonds, and money market funds.

before-tax contributions Before-tax contributions are made to a plan from an employee's paycheck before federal (and in most cases, state and local) taxes are deducted. This reduces the employee's gross income for tax purposes. Participants still pay FICA withholding on before-tax contributions, however, so Social Security benefits are not reduced by participating in a 401(k) plan.

benchmark Benchmarking is the practice of comparing a fund's performance to a group of unmanaged group of securities or bonds. The S&P 500 and Russell 2000 are benchmarks for various funds.

beneficiary A beneficiary is the person or entity designated to receive all or a portion of the proceeds of a retirement plan account or insurance policy held by a participant.

bond fund A bond fund invests in corporate, municipal or U.S. governement obligations (or a combination of these). The investment goal is to provide income rather than capital appreciation.

C

commingling Commingling assets means that a participant has combined different types of retirement funds with IRA assets. For example, a participant who combines 403(b) plan funds with an IRA will not be able to roll the money back into a 403(b) or qualified retirement plan in the future. A participant who rolls over 401(k) plan funds into a "rollover IRA" account where there have been no IRA contributions keeps the option to move those funds back into another employer's plan at a later date.

contrarian approach The contrarian approach to investing involves purchasing securities of companies that are considered undervalued in the marketplace and are out of favor with other investors.

contribution Contributions are funds placed into an employer-sponsored retirement plan, Individual Retirement Account or other type of retirement account. Depending on the type of plan, contributions may be made by an employer or employee, and may be made on a before- or after-tax basis.

country risk Country risk is the possibility that events may occur within a country that cause its economy to become unstable or decline, which may then cause investments based on that country's resources to falter. Examples of events inlcude: financial problems (government default on loans, rampant inflation, currency devaluation), political events (elections or the lack thereof, war, terrorism, scandal) and natural disasters (earthquakes, hurricanes, sudden drop in agricultural production).

credit risk Credit risk, also known as default risk, is the possibility that a bond issuer will fail to make principal and interest payments on a timely basis.

currency risk Currency, or exchange rate, risk means that investment returns could be reduced when the U.S. dollar rises in value compared to foreign currencies. This scenario could affect Americans investing in foreign securities.

D

defined benefit plan A defined benefit plan promises to pay out a specific benefit at an employee's retirement. This is usually based on an employee's total service and average salary earned in the years just before retirement, though the formula is sometimes a flat percentage of pay. Benefits are usually paid out as an annuity, though lump sum payouts may be available, depending on the plan's provisions. The employer bears the investment risk in a defined benefit plan. If the investment funds do not perform well enough to pay the promised benefits at retirement, the employer's contributions to the plan will increase.

defined contribution plan A defined contribution retirement plan pays out benefits at an employee's retirement based on the contributions and investment performance of the funds contributed to the plan. Types of defined contribution plans include 401(k), profit sharing, money purchase, target benefit and 403(b) plans. A defined contribution plan may allow employee and/or employer contributions. However, employees bear the investment risk in these plans.

direct rollover A direct rollover is a transfer of tax-deferred retirement plan money from one plan or custodian to another. In a direct rollover, the funds are made payable to the successor trustee/custodian for the benefit of the participant. The distribution is not taxable to the participant, although a Form 1099-R reporting the transfer will be issued at year-end.

If a participant is required to take a minimum distribution from his/her account (i.e., at age 70 1/2), those funds must be distributed before the direct rollover is made.

distributions Distributions are payments made to a participant from an IRA or retirement plan account.

diversification Diversification is a strategy used to reduce overall investment risk by investing in a wide range of fund classes and among a variety of securities and issuers.

E

emerging markets fund An emerging markets fund invests primarily in countries with developing economies. Because of possible political instability and currency fluctuation, these funds tend to be highly volatile.

employee contribution Employee contributions are a participant's own deposits to a retirement plan (via payroll deduction for a 401(k) or 403(b), or via check or wire for an IRA).

employer matching contribution Employer matching contributions are the amount, if any, a company contributes to an employee's retirement account. This match can be a percentage of salary or a flat dollar amount, but is usually related to the employee's contributions.

Employee Retirement Income Security Act of 1974 (ERISA) ERISA is the main law governing private pension plans. ERISA sets standards for funding and administering pension plans and governs investment practices. ERISA also established the Pension Benefit Guaranty Corporation, which guarantees pension payments to defined benefit plan participants.

excess accumulation An excess accumulation is the amount of a required minimum distribution (RMD) that a retirement plan participant fails to take on a timely basis. The IRS may assess a 50% penalty tax on these distributions.