While saving for retirement should always be simple, navigating through the thick, complicated industry terms isn’t. Between changing legislation terms and a ton of different acronyms, there is a lot to keep up with, which can become discouraging as you are preparing for your future!
To help you, we broke down the jargon and compiled everything you need to know about 401(k)s into one clear and simple list. Be sure to bookmark this and keep it handy as you’ll most likely need to reference it as you continue through your retirement journey.
401(k) Plan
A retirement savings account that offers employees an easy way to contribute a portion of their income to save for retirement. Employee contributions to their 401(k) account can be either pre- or post-tax (Roth), with money being deducted directly from an employee’s paycheck each pay period.
403(b) Plan
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for employees of public schools and certain charities. It functions like a 401(k), allowing employees to defer part of their salary into individual accounts, with taxes deferred until distribution. Additionally, 403(b) plans may include Roth accounts, where contributions are taxed upfront but withdrawals, including earnings, are tax-free.
Beneficiary
A beneficiary is a person (or entity) you choose to inherit your retirement plan balance.
Contribution Limit
Contribution limit refers to the maximum amount of money an individual or employer can contribute to the 401(k) plan within a calendar year. This limit may change annually due to inflation adjustments and other regulatory factors and is also dependent on the IRS.
Custodian
A custodian is a financial institution that holds the assets for the plan.
Deferral
An elective-deferral contribution is a portion of an employee's (Saver's) salary that is withheld by the employer and transferred into a retirement plan such as a 401(k).
Elective Deferral
Employee contributions to the 401(k) plan. These contributions are payroll deductions from employees’ paychecks and can be made as pretax and/or Roth contributions.
Employer Match
Employer match is a contribution made by an employer to an employee's retirement account and is always contingent on the employee making elective deferral contributions. This is designed to encourage employees to participate in their employers’ plan offerings.
ERISA (Employee Retirement Income Security Act)
ERISA is a federal law that sets minimum standards for retirement plans, including 401(k) plans, to protect plan participants and beneficiaries’ interests. It establishes rules regarding plan administration, fiduciary responsibilities, and reporting requirements.
Fiduciary
A fiduciary is an individual or entity responsible for managing and administering a retirement plan in the best interests of the plan participants. Fiduciaries must act prudently and solely for the benefit of the plan participants, adhering to fiduciary duties and responsibilities outlined by law.
Financial Advisor
An individual or firm that is hired by the Trustee to provide investment consultation and recommends asset diversification and investment strategy on a plan and/or participant level.
Form 5500
Form 5500 is an informational only (not a tax reporting form) filing required by the IRS and the Department of Labor for retirement plans such as 401(k) plans. It provides detailed information about the plan's operation, funding, assets, and participants. The form helps ensure compliance with regulatory requirements and provides transparency about the plan's financial health and management.
Hardship Withdrawal
A hardship withdrawal is a distribution from a 401(k) plan made by an employee in cases of financial hardship, subject to certain criteria and penalties. Common reasons for hardship withdrawals include medical expenses, tuition payments, and prevention of eviction or foreclosure.
Investment
An investment refers to the allocation of funds into various financial instruments or vehicles with the goal of generating returns and growing the account balance over time. These investments typically include a range of options such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and sometimes other asset classes. Participants in a 401(k) plan can choose from the investment options provided by their plan's investment lineup based on their risk tolerance, investment goals, and time horizon. The performance of these investments directly impacts the growth of the participant's retirement savings within the 401(k) plan.
IRA
An Individual Retirement Account (IRA) is a type of investment account designed to help individuals save for retirement in a tax-advantaged manner. There are two main types of IRAs: Traditional IRA and Roth IRA. Contributions may be tax-deductible for Traditional IRAs, while Roth IRAs offer tax-free withdrawals in retirement.
Nondiscrimination Testing
Non-discrimination testing (NDT) is a set of IRS tests designed to ensure that a company’s benefits are equitable to all eligible employees, not just highly compensated employees (HCEs). Ubiquity conducts these tests (not the IRS) based on regulations set forth by the IRS.
Participant
Any employee who has met the retirement plan’s eligibility requirements (not just actively participating).
Plan Administrator
The person identified by the employer as the one responsible for running the plan. It could be the employer, a committee of employees, a company executive or someone hired for that purpose.
Plan Document
The plan document is a legal document that outlines the terms and provisions of a 401(k) plan, including eligibility requirements, contribution limits, and investment options. It serves as the governing document for the plan, providing guidance for both employers and plan participants.
Plan Sponsor (or Employer)
The plan sponsor is the employer or organization that establishes and maintains a 401(k) plan for its employees. The sponsor is responsible for selecting investment options, plan administration, and ensuring compliance. This term differs with PEPs, and plan sponsors are instead called pooled plan provider (PPP).
Pooled Employer Plan (PEP)
A pooled employer plan is a retirement plan where multiple employers join to offer a single, shared plan, making it easier and more cost-effective to provide retirement benefits to their employees.
Pre-tax
Pre-tax contributions refer to the portion of an employee’s salary that is deducted from their paycheck and contributed to their retirement account before income taxes are withheld. These contributions are made on a pre-tax basis, meaning they are not subject to federal income tax, and in most cases, state income tax as well. Pre-tax contributions reduce the employee’s taxable income for the year, which can lower their current tax bill. However, taxes are typically deferred until the funds are withdrawn from the 401(k) account during retirement.
Profit Sharing
Profit sharing is a type of contribution made by an employer into a 401(k) plan and allocated to all eligible employees. These may be discretionary and can vary yearly based on the company's financial performance.
Required Minimum Distribution (RMD)
Required Minimum Distribution (RMD) is the minimum amount that must be withdrawn from a retirement account, such as a 401(k), each year once the account owner reaches a certain age (usually 72), to avoid penalties. The RMD amount is calculated based on the account balance and life expectancy tables provided by the IRS.
Rollover
Rollover means the process of moving funds from one retirement account to another. For example, an individual might move over from a previous employer's 401(k) plan to a plan with their new employer, or an Individual Retirement Account (IRA). This allows individuals to maintain the tax-deferred status of their retirement savings and consolidate everything involved.
Roth 401(k)
A Roth 401(k) is a type of 401(k) plan where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement. Unlike traditional 401(k) plans, Roth contributions are not tax-deductible, but qualified distributions are tax-free.
Safe Harbor
Safe Harbor is a provision in 401(k) plans that allows employers to automatically pass nondiscrimination tests by meeting certain contribution and vesting requirements. This provision helps employers avoid penalties and compliance issues related to testing failures.
Saver
A saver in a 401(k) plan is someone who is eligible to contribute a portion of their salary to their employer-sponsored retirement account. They also can be referred to as employee, enrollee, or participant.
Self-Directed Brokerage Account (SDBA)
A Self-Directed Brokerage Account (SDBA) is a feature of some 401(k) plans that allows participants to invest in a wider range of securities beyond the options offered in the plan's standard investment lineup. Participants have greater flexibility to expand their portfolio based on their preferences and risk tolerance.
Target-Date Fund
A Target-Date Fund is a type of investment fund designed to automatically adjust its asset allocation over time to become more conservative as the target retirement date approaches. These funds are structured to provide a diversified investment strategy based on the investor's anticipated retirement timeline.
Tax-Deferred
This refers to income that is not subject to taxes until a later date, such as contributions and earnings within a traditional 401(k) plan. This allows investments to grow faster since taxes on gains are postponed until withdrawals are made in retirement.
Third Party Administrator (TPA)
A third party administrator is hired by the plan administrator to assist in administering the plan in accordance with the plan documents and ensures that the plan documents are compliant with ERISA law. We act as the third party administrator for all full service plans.
Trustee
A trustee is the person or entity entrusted to make investment decisions in the best interests of plan participants. The trustee is typically assigned by the employer or board and should be named in the plan documents. Frequently, the trustee(s) will enlist another individual or group with investment experience to provide advice regarding investments or to make the investment decisions for the plan on their behalf. Like a plan administrator, trustees bear the ultimate responsibility of ensuring that investment decisions are prudent and in the best interest of the participants.
Vesting
With vesting, an employee gains ownership of employer-contributed funds over time, until they become fully vested. Once they are, they’re entitled to the full value of employer contributions upon meeting specified conditions.
