Jargon

Decoding these must-know financial terms.

  • #

    A 403(b) plan is a retirement savings plan with tax advantages that are similar to those of a 401(k) plan, but 403(b) plans are available only to employees of public schools and other eligible tax-exempt organizations.

    To save in a 403(b) plan, you need to complete and submit an enrollment form to the vendor of your choice. You will also need to submit a salary reduction agreement that will authorize your employer to make contributions to your plan. You decide how much to contribute each pay period on a before-tax basis (unless you contribute to a Roth account), up to the IRS annual limits.

    You also decide how to invest your account by choosing from various investment funds or annuities available through your plan.

    The amount you accumulate for retirement will depend on how much you save, how long you participate in the plan, the types and performance of the investment funds you select, and the fees charged by your plan.

    If you leave your job, you can roll over your balance to another employer-sponsored retirement plan, as long as the new plan accepts rollovers, or you can roll it into an Individual Retirement Account (IRA).

    You will find more details about how a 403(b) plan works in the plan’s formal documents. Visit 403bcompare.com to find approved vendors in your district’s plan.

    A 457(b) plan is similar to a 403(b) plan, but it is intended for state and government employees. The basic features of a 457 plan are the same as a 403(b) plan, but there are differences. With a 457 plan:

    • There are no distributions available while you are employed, except in emergencies.
    • There is no 10% penalty for a distribution upon termination, as there is with a 403(b) plan.
    • There is no requirement that the 457 plan be offered to all employees, as there is with a 403(b) plan.
  • A

    An annuity is an insurance product that pays out income. Here’s how it works: You make an investment in an annuity, and then that investment makes payments to you at a future date. The size of the payments you receive is determined by how much you put in and the length of time you contribute to the annuity.

    Annuity products are some of the most expensive and complicated investments in the marketplace.

    Many people think annuities are a good addition to their retirement plan, but there are some downsides to them. It’s important to realize that the benefits you receive with an annuity come at a price. Annuities typically have higher fees than other retirement savings vehicles, often including a mortality and expense charge, a surrender charge for early withdrawal, administrative fees, and investment management fees. It’s important to have a solid understanding of annuities before investing in them.

    ALL ANNUITIES ARE NOT THE SAME

    There are different types of annuities, all with different features, costs, provisions, restrictions, and fees. What is true in all cases is that you are handing over the control of your money. It can be very difficult and expensive to change your mind and get your money back.

    TYPES OF ANNUITIES

    Fixed Annuity   This is offered by insurance companies through an insurance contract. The insurance company guarantees a minimum rate of return on your funds and the payout. These contracts are regulated by the California Department of Insurance. Check with your vendor about any surrender fees and rates of return or check 403bcompare.com for more information.

    Variable Annuity   This is offered by insurance companies and allows you to invest in mutual funds through an insurance contract. As the name implies, the rate of return is variable, meaning it varies with the returns of the mutual fund(s) you have selected. These contracts are regulated by the SEC and FINRA. Fees are paid to both the mutual fund company and the insurance company for insurance provisions.

    Equity-Indexed Annuity   This is offered by insurance companies through an insurance contract. These investments provide a minimum guaranteed interest rate combined with an interest rate linked to a market index. These are complex investment vehicles with often opaque interest and payout calculations and surrender fees. Equity-indexed annuities are not regulated by the SEC or FINRA. Read the FINRA investor alert on equity-indexed annuities at www.finra.org.

    Dividing up your investments among different types of assets—stocks, bonds, and cash—to reduce your risk of losses. Your specific asset allocation will largely depend on how close you are to retirement and your risk tolerance.

    Through the years you should periodically rebalance your asset allocation, moving more of your money away from stocks (high risk) and into bonds and cash (lower risk) as you get closer to retirement.

    These are the automatic savings payments you make from your paycheck into a retirement savings plan.

  • B

    Some mutual fund companies charge fees if you move or withdraw your money during a stated period. A back-end load, also known as a “contingent deferred sales load,” may apply if you withdraw or exchange your money out of the mutual fund, typically during the first five years. Conversely, some mutual fund companies charge you a front-end load or commission on each contribution you make. Be sure to ask your vendor about your fees or check 403bcompare.com.

    The person or institution named by a plan participant to receive the benefits of the account if the participant dies.

    When you invest in bonds, you are lending money to an entity (typically a company or government) for a defined period of time at a variable or fixed interest rate. Historically, bonds have provided a lower return than stocks, but typically haven’t been quite as volatile.

    An option offered by some retirement plans that allows participants to invest in funds and individual stocks and bonds outside the regular investment menu. Also referred to as a self-directed account.

  • C

    This agency regulates insurance products and agents who sell to consumers in the state of California. As the largest protection agency in the state, it serves consumers by overseeing insurer solvency, licensing agents and brokers, conducting market reviews, resolving consumer complaints, and investigating and prosecuting insurance fraud. If you have a complaint with a fixed or equity-indexed vendor, you can make a complaint with this agency by calling 800-927-4357 or online at http://www.insurance.ca.gov.

    This is the acronym for the California Public Employees’ Retirement System, an agency in the California executive branch that manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families.

    This is the acronym for the California State Teachers’ Retirement System. It provides retirement, disability, and survivor benefits for California’s almost one million pre-kindergarten through community college educators and their families. It is the largest teachers’ retirement fund in the United States.

    A provision that allows employees who are at least 50 years old to make contributions to their retirement plan above the regular annual limit. This allows workers to “catch up” with saving as they get closer to retirement.

    The amount of each paycheck that is deposited in your retirement account. You decide on the amount of your contributions, up to certain annual limits. With some plans, you can decide to have the money taken out of your paycheck before taxes are deducted, while other plans allow you to make after-tax contributions.

    The maximum amount of money you can contribute to your 403(b) plan each year, set by the federal government. The limits change every year to track inflation. In 2018, you can contribute up to $18,500. If you’re 50 or older, you can contribute an additional $6,500 (called a “catch-up contribution”), for a total of $25,000.

    This is the acronym for the California Teachers Association.

    The preeminent voice for educators in California’s public schools and colleges, CTA is also a powerful and passionate advocate for students and public education. Our 325,000 members not only make us strong, they also make us the state’s largest professional employee organization.

    Founded in 1863, CTA has become one of the strongest advocates for educators in the country. CTA includes teachers, counselors, school librarians, social workers, psychologists, and nurses. These educators in the K–12 school system are joined by community college faculty, California State University faculty, and education support professionals to make CTA the most inclusive and powerful voice of educators in the state.

  • D

    The percentage of your annual pay that is deposited into your retirement account.

    The money you withdraw from your retirement account. Distributions may be taken starting at age 59 ½. Distributions taken before then are subject to a 10% early withdrawal penalty. You are required to begin taking distributions after age 70 ½.

    This refers to the ways you distribute your money among several different investments to spread out your risk. That way, if one of your investments decreases in value, your other investments may be increasing to offset it. Diversification can minimize risk, even if you’re investing in several higher-risk funds.

    Dollar cost averaging is the practice of investing your money regularly, a little at a time. By spreading your contributions evenly over a period of time, you acquire more shares when the cost per share is down, and fewer shares when the cost is up. This reduces the risk of buying all your shares at the higher price and selling all of them at the lower price. Your 403(b) plan contributions are a percentage of your earnings that is deducted in equal amounts from each paycheck. And that means you are automatically practicing dollar cost averaging.

  • E

    The 10% penalty tax you must pay to the IRS on 403(b) plan distributions taken before you reach age 59 ½. In addition to this penalty, you will also pay regular income taxes on any money you withdraw.

    Ownership in a company through the purchase of stock. When you buy shares of stock in a company, you have equity in the company. Equity investments are generally considered riskier than fixed-income investments.

    The Employee Retirement Income Security Act of 1974 (ERISA). This federal law sets standards for plan sponsors and plan administrators in order to protect the rights of plan participants. ERISA is enforced by the U.S. Department of Labor.

    The expense ratio is the annual fee that all investment funds charge their shareholders. It is the percentage of assets deducted each year for fund expenses, including management and administration fees, operating costs, and other asset-based costs incurred by the fund.

    Look for the expense ratios in your account statement, summary plan description, or summary annual report. They also appear in the fund’s prospectus.

  • F

    A fiduciary is any individual or group who makes decisions in administering and managing a retirement plan or who has the power to control the plan’s assets.

    Generally, a plan’s fiduciaries will include the trustee, the investment managers, and the plan administrator. Under federal law, fiduciaries are subject to certain standards, called fiduciary responsibilities, because they act on behalf of the plan participants.

    Fiduciary responsibilities include:

    • Acting solely in the interest of plan participants
    • Selecting a diverse menu of investment options
    • Monitoring investment performance
    • Paying only reasonable expenses and fees for the plan
    • Providing adequate information to participants in a timely manner

    FINRA is dedicated to investor protection and market integrity through the regulation of broker-dealers. FINRA is not part of the government. It is a not-for-profit organization authorized by Congress to protect America’s investors by ensuring that the broker-dealer industry operates fairly and honestly. FINRA oversees some agents who sell plans to educators. You can check the background of an agent at www.finra.org/brokercheck or call 800-289-9999. If you feel you’ve been treated unfairly, you can make a complaint at www.finra.org/complaint.

    Fixed-income investments pay a fixed rate of return in the form of interest or dividends. A bond is an example of a fixed-income investment. Fixed-income investments are generally less risky than equity investments (stocks).

  • G

  • H

  • I

    The selection of investment choices offered by a retirement plan. Most plans offer a menu of mutual funds that include stock funds, bond funds, and money market funds.

    This is the chance of losses relative to your chance for gains. To grow your investments, you must be willing to take on some amount of risk, so it’s important to understand two kinds of risk: market risk and inflation risk.

    1. Market risk refers to the value of your investments going up or down over time. Generally, the more money an investment can potentially make for you, the more it is also subject to loss at any given time. And lower-risk investments tend to have lower potential for return.
    2. Inflation risk eats away at the buying power of your paycheck and investments. You’ll need to stay ahead of the rate of inflation over time just to break even. So, if inflation averages 2.5% each year, you need an annual investment return over 2.5% just to beat inflation.

    An Individual Retirement Account, or IRA, is a form of retirement plan that provides certain tax advantages for retirement savings. You can contribute up to $5,500 to an IRA for 2018. People age 50 and over can make an additional $1,000 catch-up contribution.

  • J

  • K

  • L

    A one-time payout of the entire balance of a retirement account. When you retire or leave your job, you can take a lump-sum distribution of your retirement savings in cash, but you will owe income taxes on the amount, plus a 10% penalty if you’re under age 59 ½. To avoid a tax hit, you can roll the lump-sum distribution over to your new employer’s plan or to an IRA, and you won’t pay taxes on it until the money is withdrawn.

  • M

    A mutual fund is a collection of stocks, bonds, and/or money market instruments purchased by a professional fund manager with money pooled from individual investors.

    Mutual funds provide the opportunity to directly invest in a wide variety of investment types, allowing the investors to boost their buying power. The combined holdings of a mutual fund are called a portfolio.

    Mutual funds may invest in a wide variety of stocks and bonds, which helps to manage investment risk. To help you make informed decisions when choosing the mutual funds for your 403(b) or 457 plan, review each mutual fund’s disclosure document (prospectus). Also identify any fees, sales charges, and the expense ratio of the fund before investing.

    403(b)(7) or 457 mutual funds are investments made directly to mutual funds through a custodial account offered by insurance company vendors, banks, or mutual fund companies (e.g., Vanguard, Fidelity) that can be sold by brokers, independent agents, and insurance agents or offered as direct investment options. This type of mutual fund does not require an insurance contract or insurance fees; fees will be paid to the mutual fund company, custodian, and recordkeeper. CTA offers a 403(b)(7) direct invest option, which allows you to invest directly in mutual funds.

  • N

    The total value of all holdings owned by a mutual fund divided by the number of shares outstanding. This is the price at which you can buy and sell shares of the fund. The NAV is calculated daily.

  • O

  • P

    These are retirement plans that require an employer to make contributions into a pool of funds set aside for a worker’s future. These funds are invested on the employee’s behalf, and the earnings on the investments generate income for the worker throughout retirement.

    An employee or former employee who participates in a retirement savings plan.

    A financial services company that provides your retirement plan’s investments. A plan provider can be a mutual fund company, a brokerage firm, or an insurance company. Plan providers also offer plan administration and recordkeeping services, though your employer may hire a separate company to act as the plan administrator.

    A document that provides important information about a mutual fund, including the fund’s objectives, investments, risk level, expenses, and fees. Be sure to carefully review the prospectus before you invest in a mutual fund.

  • Q

    A court order that allows a spouse, former spouse, child or other dependent to receive all or a portion of a participant’s 403(b), 457, or 401(k) benefits.

    A retirement plan that meets IRS rules and regulations in order to qualify for favorable tax treatment. A 403(b) is a qualified plan in which contributions are tax-deductible, and taxes on earnings are deferred until the money is withdrawn.

  • R

    The amount you must withdraw from your 403(b) account each year once you reach age 70 1/2.

    Your RMD amount is calculated using factors including your life expectancy and account balance. Although your plan administrator may calculate your RMD, you (the participant) are ultimately responsible for calculating your RMD and for taking the correct amount on time every year from your account.

     

    The gain or loss on an investment in a given period, usually expressed as a percentage.

    The chance that an investment will lose value. Some investments are riskier than others. Stocks carry more risk than bonds and cash investments. Risk is related to return: The more risk you are willing to take with your money, the more potential there is for a higher return—and also for a loss.

    How comfortable you are with the possibility of your investments losing value. In general, your risk tolerance has to do with how much time you have before retirement. When you are younger, you may be more comfortable taking on aggressive, riskier investments. As you near retirement, you may want less risky investments.

    When you transfer (or “roll over”) money from a retirement account to an IRA. This allows you to keep the tax-deferral benefits of a 403(b) when you change jobs or retire. You don’t pay any taxes on the money that is transferred, and your money continues to grow tax-free. To avoid a 20% tax-withholding penalty, the rollover must take place directly from one custodian to another.

    These are retirement plans that allow you to make contributions after you have paid taxes on that income. Roth accounts are useful if your tax bracket will be higher after you retire.

  • S

    The portion of your salary that is deducted from your paycheck and placed in your retirement account rather than included as take-home pay. Expressed as a percentage or dollar amount.

    This is the agreement that you sign to allow a portion of your pay to be placed into your retirement account. Without filling out this form, you won’t be able to fund your retirement account. You can get this form from your district’s retirement plan administrator.

    A stock investment represents partial ownership of a company. Historically, stocks have provided the highest long-term investment return, but they have lots of up-and-down variability (known as volatility) in the short term.

    Surrender fees are often found in 403(b) fixed and variable annuity products. It is important to determine if surrender fees apply to you before making an investment change. It is a fee that you must pay when you move your funds to another vendor during the “surrender period,” which generally ranges from 5 to 10 years. The fee is generally a percentage of the amount you want to withdraw and can cost anywhere from 1% to 10%. Check with your vendor or go online at 403bcompare.com to identify any surrender fees in your plan.

  • T

    A retirement account in which payment of taxes is delayed until the money is withdrawn. Examples include 403(b) and employer-sponsored 401(k) plans.

    This is the amount of time you have before you retire or plan to use the money in your account. Generally, if you have a lot of time before you retire, you can tolerate more risk than older savers who are investing for the short term.

    Your gain or loss on an investment in a given year. The total return is usually expressed as a percentage.

  • U

  • V

  • W

  • X

  • Y

  • Z