Employee Retirement Plans

Empower yourself with the language of insiders. We decipher the arcane terms, epigrammatic abbreviations, and weird words used in the retirement plan industry.

401k plan

A tax-deferred investment device for employees. 401k plans allow employees to invest pre-tax dollars into individual retirement plan accounts. Employers may also match employee investments in the 401k.

Compliance testing

Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.

Employer matching contribution

The amount, if any, that the employer contributes to the employee's 401k account. Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.

ERISA

Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.

Loan

Employees can borrow money from a 401k account, but are required to pay it back. A fixed rate of interest is applied to the loan but there are no withholding taxes or penalties applied if you pay it back in the allotted time period.

Participant contributions

Refers to the salary reductions that employees contribute to their 401k plans.

Participant-directed investing

In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long-term goals and risk.

PBGC

Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

Pooled investing

The employer pools the participant's money and chooses how to invest it. Responsibility and care are required to make sure that employees' money is invested properly.

Profit sharing plan

A defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.

Savings plan

Savings plan (sometimes called thrift plans) provide matching company funds to an employee's after-tax investments. In most cases, a 401k is a more efficient means of achieving the same benefits.

Vesting

The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401k plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.

Withdrawals

401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2. When money is withdrawn from a 401k plan, the withdrawal is also referred to as a distribution.