Here are many of the industry terms you’re likely to come across when a 401(k) is being discussed.
If you love glossaries, you may also want to refer to this even
more expansive list
of industry terms.
If lawyers had a sense of humor they’d let me call a 3(16)
a Super Fiduciary, because a 3(16) handles both investment management and day-to-day operations of your plan (I think that’s pretty Super). But we don’t want to get in trouble with our lawyers, so we’ll use the official Department of Labor title – Named Plan Administrator. 3(16) refers to a specific section of the ERISA code in which it defines different types of fiduciaries
. A 3(16) fiduciary has responsibility for the day-to-day administration of the 401(k), including sending notices as required by ERISA, administering loans, ensuring that the rules of the plan are administered, and maintaining documentation of compliance.
A type of fiduciary. Refers to a specific section of the ERISA code
in which it defines different types of fiduciaries.
A 3(21) is an investment advisor who can be hired to help select investments for
the 401(k). They are a co-fiduciary, meaning that they do not have
full authority. The 3(21) makes recommendations but the sponsor still
makes the final decision. Kind of like - buy low, sell high.
Therefore, the employer still bears liability for the investment
A type of fiduciary. Refers to a specific section of the ERISA code
in which it defines different types of fiduciaries.
is an investment advisor who can be hired to make all the investment
related decisions for the plan (which funds to put in the plan,
etc.). Because they have full discretion, they take on all the
liability and the plan sponsor is relieved of much of its liability.
The sponsor is responsible for prudently selecting and monitoring the
3(38), but the 3(38) bears all the investment advisory risk.
Named after section 401(k) of the Internal Revenue Code, a 401(k) plan is a defined contribution plan that allows employees to have a portion of their salary deducted from their paycheck and contributed to a retirement account. These special retirement accounts have certain tax advantages. In a “Traditional” 401(k) plan, federal (and sometimes state) taxes on the employee contributions and investment earnings are deferred, typically until retirement. Read about another popular 401(k) feature, Roth 401(k)s, below. Employers may also make contributions to a participant's 401(k) account.
This is the part of ERISA that allows employees to make their own investment decisions. When a plan sponsor allows participants to make decisions regarding their 401(k) investment choices 404(c) regulates the information provided by the sponsor and the fund selections picked to be part of the investment fund lineup.
Actual Deferral Percentage and Actual Contribution Percentage. These
are types of tests that the DOL uses to see if the plan is primarily
benefitting the executives or is serving the population as a whole.
The DOL generally likes it when the plan benefits everyone - if you
don’t pass, you generally either have to pony up money for
rank-and-file employees (called non-highly compensated employees) or
you’ll have to return contributions to highly compensated employees.
In the context of a 401(k) or retirement plan, an annuity is a contract sold by an insurance company designed to pay out income to the retiree who purchases it. Generally, with a retirement annuity, the insurance company agrees to make payments regularly to a consumer for a specific term/period, or in some cases for the rest of consumer’s life. Annuities are not without controversy due to their high fees and certain compensation arrangements paid by the insurance companies to the brokers who sell them. Learn more about annuities here
We think that this is how 401(k)s should just work. Basically, once
an employee is eligible to participate in the 401(k) they
“automatically join” unless they take an action to cancel. Plan
design specifies how these automatic deferrals will be invested (we
put people into an age-appropriate Target Date Fund).
do not want to make contributions to the plan must actively file a
request to be excluded from the plan. Participants can generally
change the amount of pay that is deferred and how it is invested.
A person, persons or trust designated to receive the plan benefits of a retirement plan’s participant in the event of the participant's death.
In the context of a 401(k) plan, a blackout period is the period of time when plan participants are not permitted to make changes to their investment selections or to request distributions or loans. This occurs when the plan sponsor is switching 401(k) vendors or recordkeepers. Blackout periods during a recordkeeper switch can last up to 60 days.
In a defined contribution retirement plan, a bank or trust company maintains the plan’s assets and a record of which participant owns which securities and investments. The recordkeeper does not take a role in managing the portfolio, but does provide safekeeping of the plan’s assets.
Early Withdrawal Penalty
A 10% penalty tax for withdrawal of assets from a qualified
retirement plan prior to age 59 1/2, death, disability, or
retirement. This 10% penalty tax is in addition to regular federal
and (if applicable) state tax.
The amount that a company’s employee contributes to a 401k plan. Also known as an elective deferral.
Conditions that must be met in order to participate in a plan, such as age, hours of service, or months of employment requirements.
Passed in 1974, the Employee Retirement Income Securities Act is the legislation that describes the requirements for 401(k)s and many other company sponsored benefit programs, including retirement programs. I highly recommend that anyone with insomnia give it a read.
The percentage of a fund's assets that are used to pay its annual expenses.
A bond that protects participants in the event a fiduciary or other
responsible person steals or mishandles plan assets. All 401(k)
plans must have a Fidelity Bond - but we take care of it for our
A fiduciary is someone who is legally bound to put the interests of
their clients ahead first in financial matters and is liable if they
do not. A fiduciary should follow the Prudent Expert rule (defined in
which basically means that they should make
smart, well-informed decisions that are in the best interest of plan
participants. Of course, ERISA was written by lawyers (who probably
charged by the word) so it states a fiduciary should “discharge his
duties with respect to a plan with the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent man
acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims.”
Wow, that’s gotta be a $1,500 sentence.
Plan assets surrendered by participants upon termination of employment before being fully vested in the plan. Forfeitures may be distributed to the other participants in the plan or taken by the employer to offset plan expenses, including employer contributions to other participants in the plan.
which all qualified retirement plans (excluding SEPs and SIMPLE IRAs)
must file annually with the IRS.
The long and short of it is that, if you offer a 401(k) to your
employees, you are taking on some fiduciary responsibilities. You can
hire other people to take over some of those responsibilities.
Hardship or In-Service Distribution
A participant's withdrawal of their plan contributions prior to retirement. Eligibility may be conditioned on the presence of financial hardship. The IRS does not like it when retirement plan funds are withdrawn early, and these distributions are taxable as early distributions and are subject to a 10% penalty tax if the participant is under age 59½.
Highly Compensated Employees
Highly compensated employees are people who earned more than $120,000 from their employer, or own a larger stake in the company. The drawback of being highly compensated is that you may be restricted on what you can contribute to a 401(k), in particular if the plan fails to have enough contributions from non-highly compensated employees.
A contribution made by the company to the account of the participant in ratio to contributions made by the participant. Matching contributions are often used as a plan design strategy with the purpose of boosting employee savings into the plan, by encouraging employees to contribute their own funds in order to receive the matching funds.
Ever wish a small company could stand up to the large 401(k) service
provider to demand lower fees and better service? Well, that’s why
we created a Multiple Employer Plan - essentially it allows us to
create a group 401(k) for small businesses so that we can flex our
combined purchasing power together (our tagline is “honest, simple,
together” after all).
A Multiple Employer Plan is kind of like group health insurance only
for small company retirement plans. Essentially, different companies
can join one single plan. But they don’t have to all fit into one box
- companies can choose to customize key aspects of their plan (like
eligibility, match, etc.). They are also recordkept separately and
still have their own IRS filings (which we take care of). But, by
combining the purchasing power of many small companies, we can
negotiate with mutual fund companies and recordkeepers to lower costs
Note, this is not to be confused with a multi-employer plan, which is
similar but is typically used by unions. It’s not that we don’t like
unions (my parents were union teachers) but we’re just not there yet.
An investment fund designed to create a portfolio that may reduce the risk of owning individual shares or achieve a particular investment strategy. Mutual funds are common investment options in 401(k) plans. Although plan sponsors assume certain fiduciary liabilities when they select investment options like mutual funds, working with a 401(k) advisor can help reduce these risks, especially if the advisor assumes the role of a 3(38) fiduciary.
A particular type of contribution that an employer makes (if they decide to, that is!) to their employee's retirement plan accounts - regardless of the contributions (or lack thereof) that the employee makes. Non-elective contributions can be part of a Safe Harbor plan design strategy, as well as a profit-sharing strategy.
Non-Highly Compensated Employees (NHCEs)
Employees who are not highly compensated, as specifically defined by ERISA. These employees usually earn less than $120,000 in 2017 and don’t own a significant stake in the company. See the highly compensated employees definition above.
See highly compensated employees
By regulation, each 401(k) retirement plan must have Plan Administrator, who is the individual, group or corporation responsible for day to day operations. This entity is named in the 401(k)’s plan document. If no plan administrator is name in the plan document, then the plan sponsor is generally the plan administrator.
Depending on the plan rules, a 401(k) participant may be allowed to take out a loan from their retirement plan. The loan is taken from the participant’s accumulated assets and, by regulation, may not to exceed 50% of the vested balance or $50,000, whichever is less. The ForUsAll’s standard 401(k) plan design allows 401(k) loans.
Basically, profit-sharing plans
allow employers to put money (i.e., contribute) to employee accounts according to a predefined formula.
Profit-sharing plans can be great compliments to a 401(k) and
provides employers another way to reward employees with an enhanced
retirement plan. It can be structured to be really flexible (e.g.,
only contribute during good years, etc.) but must benefit both rank
and file employees and owners/managers.
The name says it all… This is the person who is trusted to exercise
exclusive authority and discretion to manage and control the assets of
the plan; named as such either in the trust document or appointed to
Qualified Default Investment Alternative (QDIA)
Qualified Default Investment Alternative. If a participant does not elect to choose which investments are made out of their 401(k) contributions, the plan sponsor uses the QDIA as their investment election. QDIA’s are a good way for plan sponsors to encourage participants to invest in assets that are likely to drive retirement savings success. ForUsAll likes to use age-appropriate target date funds as QDIAs.
Qualified Matching Contributions (QMACs)
These matching contributions are contributions made by the plan sponsor and are always fully vested when made. These are subject to the same distribution restrictions as elective deferrals, except for hardship withdrawals.
Qualified Non-elective Contributions (QNECs or QNCs)
These nonelective contributions are fully vested when made. They may be treated as matching contributions in the ADP test, and are subject to the same distribution restrictions as elective deferrals (except for hardship withdrawals).
Qualified plans are retirement plans that qualify for favorable tax treatment because they meet the regulations and requirements of section 401(a) of the Internal Revenue Code. Qualified plans include both 401(k) and deferred profit sharing plans.
401(k) Recordkeeper (RK)
The 401(k) recordkeeper
is essentially the bookkeeper of the 401(k) plan, and the recordkeeper keeps track who’s in the plan, what investments they own, and what money is going in or out. An independent 401(k) advisor will work with your company to find the right recordkeeper for your employees and business. Your employees may login to access their investments funds, make elections, etc. Your company’s HR manager may also use the recordkeeper as the place to monitor the plan and make certain changes to it. ForUsAll has built certain technology interfaces that may sit on top of the recordkeeper to provide an enhanced employee and administration experience.
The IRS calls a Roth account a “feature” in a 401(k) that allows employees to make elective contributions on an after-tax basis. Qualified distributions from Roth plans, including both the Roth contributions and their associated earnings, are distributed tax-free. This compares to “traditional” 401(k) plans where the contributions are made on a pre-tax basis and taxes are more typically paid when the assets and earnings are distributed.
This is what you want to do, as a plan participant, if you start a new job with a good 401(k) and have 401(k)’s from previous employers. A rollover is the transfer of a qualified plan distribution from one qualified retirement plan or individual retirement arrangement to another qualified retirement plan or individual retirement arrangement. These transfers can be made without incurring a tax liability if made into a qualified retirement plan or individual retirement arrangement.
Safe Harbor Plan
A Safe Harbor Plan is optional plan design that allows your plan to be exempt from the IRS nondiscrimination test. Basically, the government does not want the retirement plan to be a tax shelter for only the highly compensated employees, and therefore there are several tests that the plan has to pass. If the plan is in danger of failing these tests, employers can basically spend their way out of a nondiscrimination failure by having the company makes specific 401(k) contributions on the behalf of all eligible employees and elects to designate their plan a “Safe Harbor.” At ForUsAll, we believe it’s the responsibility of a good 401(k) advisor is to help you determine if you need to offer a Safe Harbor plan - including regularly running IRS tests during the year. Learn more about Safe Harbor plans in our Safe Harbor 401(k) Plan Resource Center
Summary plan description. This document summarizes the plan’s rules and how the retirement plan works. ERISA requires that every 401(k) make this document available to employees so they’ll know how to use the retirement plan. That said, these things can be ridiculously complicated, full of legal jargon and are hard for most people to understand. Ours isn’t much better, but we are working on making it simple and readable (which it turns out is pretty time consuming once lawyers get involved).
This is the employer who is offering (i.e., “sponsoring”) the 401(k). Also called the Plan Sponsor.
Summary Annual Report
A report that companies must file annually on the financial status of
the plan. The summary annual report must be automatically provided to
participants every year.
A collective investment fund which is meant to offer a simple solution whereby a portfolio becomes more conservative in its asset allocation (balancing risk with reward) as the target date approaches. ForUsAll believes in constructing a diversified fund menu with age-appropriate target date funds as the qualified default investment alternatives (QDIA).
Top Heavy Plan
The IRS does not want retirement plans to become a tax shelter mainly for highly compensated employees. A Top Heavy Plan is a plan that is failing an IRS test in that too high a percentage of the plan’s assets are held by highly compensated employees. Specifically, plans are Top Heavy when, as of the last day of the prior plan year, the total value of the plan accounts of key employees is more than 60% of the total value of the plan assets.
The degree to which a participant is entitled to a portion of the money employers have deposited on their behalf. For example, some 401(k) plans have matching contributions that “vest” immediately while others vest over 6 years. Employees who leave the company prior to the full vesting date may lose some of their matched contributions.