12b-1 FeesFees paid by a mutual fund out of fund assets to cover the costs of marketing and selling fund shares. See also Distribution Fees and Shareholder Service Fees.
404a-5A section of federal pension law (ERISA) that requires employers who sponsor ERISA covered, participant directed retirement plans, that pay plan expenses from plan assets, to provide participant level fee disclosure information on at least an annual basis. The disclosure is designed to increase fee transparency and to help participants make informed decisions regarding the investment selections in their accounts.
404(c)A section of federal pension law (ERISA) that gives an employer general protection against fiduciary liability for investment decisions employees make for their individual retirement plan accounts in a defined contribution plan. Compliance with Section 404(c) is discretionary. An employer choosing to comply with Sec. 404(c) must provide investment choices and certain information that allow employees to make informed decisions about directing the investments in their retirement plan accounts.
Active ManagementThe trading of securities to take advantage of market opportunities as they occur, in contrast to passive management. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell.
Administration ExpensesThe day-to-day costs for basic administrative services, such as plan recordkeeping, accounting, and legal and trustee services, that are necessary to run a retirement plan. These expenses also may include the costs of telephone voice-response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation, and online transactions.
AggressiveAn investment approach that accepts above-average risk of loss in return for potentially above-average investment returns.
Aggressive Growth FundAn investment fund that takes higher risk of loss in return for potentially higher returns or gains.
Annual Rate of ReturnThe annual rate of gain or loss on an investment expressed as a percentage.
Annual ReportA yearly report or record of an investment’s (e.g., a mutual fund’s or company’s) financial position and operations.
AnnuityA contract between an individual and an insurance company under which the insurer promises to make periodic payments to the individual (or another designated person) for an indefinite period (e.g., the life of the individual) or for a set period. The individual buys the annuity with either a single payment or a series of payments.
AppreciationAn increase in the value of an investment.
AssetAnything having commercial or exchange value that is owned by an individual, institution, or business.
Asset AllocationThe diversification of investments among several asset classes, such as stocks, bonds, and short-term investments (e.g., cash equivalents). Proper asset allocation may limit risk and increase opportunities.
Asset ClassA category of investments, such as stocks, bonds, or cash equivalents.
Average Annual Total ReturnThe yearly average percentage increase or decrease in an investment’s value that includes dividends, gains, and changes in share price.
Average Portfolio MaturityThe average maturity of all the bonds in a bond fund’s portfolio.
Back-end LoadA sales charge investors pay when they redeem (or sell) mutual fund shares, insurance products, or other investments, generally used to compensate brokers. Also known as a Deferred Sales Charge.
Balanced FundA mutual fund that invests in a combination of asset classes (usually stocks and bonds and, in some cases, cash equivalents). Balanced funds seek to provide growth and income.
Barclays Capital U.S. Aggregate Bond IndexA common index widely used to measure performance of U.S. bond funds.
Basis PointOne-hundredth of one percent, or 0.01%. For example, 20 basis points equal 0.20% (0.002). Investment expenses, interest rates, and yield differences among bonds are often expressed in basis points.
BenchmarkA standard against which an investment’s performance can be compared, often an index of securities in the same asset class as the investment.
BondThe debt instrument (or “IOU”) of a corporation or government entity that promises to pay the investor a specified amount of interest for a specified time period, with principal to be repaid when the bond matures.
Bond FundA fund that invests primarily in bonds and other debt instruments.
Bond RatingA rating or grade that is intended to indicate the credit quality of a bond, considering the financial strength of its issuer and the likelihood that it will repay the debt. Agencies such as Standard & Poor’s, Moody’s Investors Service, and Fitch issue ratings for different bonds, ranging from AAA (highly unlikely to default) to D (in default).
BrokerA person who acts as an intermediary between the buyer and seller of a security, insurance product, or mutual fund, often paid by commission. The terms broker, broker/dealer, and dealer are sometimes used interchangeably.
Brokerage WindowAn investment option giving plan participants and beneficiaries the ability to set up self-directed brokerage accounts to select investments beyond those designated by a retirement plan.
Capital Appreciation FundAn investment fund that seeks growth in share prices by investing primarily in stocks whose share prices are expected to rise.
Capital GainAny gain realized from the sale of a capital asset.
Capital LossThe loss in the value of an investment, calculated by the difference between the purchase price and the net sale price.
Capital PreservationAn investment goal or objective to keep the original investment amount (the principal) from decreasing in value.
Capitalization (Cap)The total market value of a company's outstanding equity.
Short-term securities, such as Treasury bills, money market mutual funds, or short-term bank certificates of deposit that provide safety and liquidity but historically have only marginally outpaced inflation in terms of return.
Certificates of Deposit (CDs)Money deposited in a financial institution for a set period of time at a specified interest rate. The risk of losing principal with CDs issued by federally insured institutions is very low.
Closed-end FundA type of investment company that does not continuously offer new shares for sale but instead sells a fixed number of shares at one time in the initial public offering (IPO). After a fund’s IPO, its shares typically trade on a secondary market, such as the New York Stock Exchange. Legally known as a “closed-end company.”
Collective Investment FundA trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Like mutual funds, collective investment funds may have different investment objectives.
CommissionCompensation paid to a broker or other salesperson for his or her role when investments are bought or sold.
Common StockSecurities that represent an ownership interest and give the investor voting rights in the issuing corporation.
Company Stock FundA fund that invests primarily in employer securities and may also maintain a cash position for liquidity purposes.
Competing FundsAn investment fund that is identified by the investment manager of another fund and is subject to special rules relating to an investor’s ability to buy and sell investments between the two funds. See Equity Wash Restriction.
Compound InterestInterest earned not only on the original investment but on its accrued earnings as well.
ConservativeAn investment approach that accepts lower rewards in return for potentially lower risks.
Contingent Deferred Sales Load (Charge)A sales charge that investors pay when they redeem (or sell) mutual fund shares. The amount of the charge depends on the length of time shares were held. After a specified holding period, the charge reaches zero.
Corporate BondA bond issued by a corporation, rather than by a government. The credit risk for a corporate bond is based on the repayment ability of the company that issued the bond.
Credit RiskThe risk that a bond issuer will default, meaning not repay principal or interest to the investor as promised. Credit risk is also known as "default risk."
Current YieldThe current rate of return of an investment calculated by dividing its expected income payments by its current market price.
CustodianA person or entity (e.g., bank, trust company, or other organization) responsible for holding financial assets.
Deferred Sales ChargeA sales charge that investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers. Also known as a Back-end Load.
DeflationThe opposite of inflation — a decline in the prices of goods and services.
DepreciationA decrease in the value of an investment.
Designated Investment AlternativeThe investment options picked by your plan into which participants can direct the investment of their plan accounts.
Distribution FeesFees to compensate brokers and others who sell fund shares and to pay for advertising and the printing and mailing of prospectuses to new investors and the printing and mailing of sales literature. Part of 12b-1 Fees.
DiversificationThe practice of spreading money among different investments to reduce risk, such as investing in different companies in various industries or in several different types of investments. Diversification does not ensure a profit or protect against loss in a declining market.
DividendPayments made by a corporation to its shareholders from past and current earnings. The amount an investor receives is based on the number of shares owned.
Dollar-Cost AveragingInvesting a fixed amount of money in a specific investment at regular intervals, regardless of market conditions or prices. More shares are purchased when prices are low and fewer shares are purchased when prices are high. In a fluctuating market, the average cost per share is generally lower than the average price per share.
Dow Jones Industrial Average (Dow or DJIA)A widely followed price-weighted index of 30 of the largest, most widely held U.S. stocks.
Emerging MarketGenerally, economies that are in the process of growth and industrialization, such as in Africa, Asia, Eastern Europe, the Far East, Latin America, and the Middle East, which, while relatively undeveloped, may hold significant growth potential in the future. Investing in these economies may provide significant rewards, and significant risks. May also be called "developing markets."
Emerging Market FundA fund that invests primarily in emerging market countries.
Employer SecuritiesAn investment option offered by some retirement plans that generally consists of stock in the corporation sponsoring the plan for its employees.
EquityThe ownership interest of shareholders in a corporation.
Equity FundA fund that invests primarily in equities.
Equity Wash RestrictionA provision in certain stable value or fixed income products under which transfers made from the stable value or fixed income product are required to be directed to an equity fund or other non-competing investment option of the plan for a stated period of time (usually 90 days) before those funds may be invested in any other plan-provided competing fixed income fund (such as a money market fund).
Exchange FeeA fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group (or “family of funds”).
Exchange-Traded Fund (ETF)A type of investment company whose shares trade on stock exchanges at prices determined by the market. Compare to Mutual Fund.
Expense RatioA fund’s total annual operating expenses (including management fees, distribution (12b-1) fees, and other expenses) expressed as a percentage of average net assets.
Face ValueThe amount a bond issuer is required to repay investors on the bond’s maturity date.
Federal Deposit Insurance Corporation (FDIC)A federal agency that insures money on deposit in member banks and thrift institutions.
Financial Industry Regulatory Authority (FINRA)A self-regulatory organization for brokerage firms doing business in the United States. FINRA operates under the supervision of the SEC. The organization’s objectives are to protect investors and ensure market integrity.
Financial StatementsThe written record of the financial status of a fund or company, usually published in the annual report. The financial statements generally include a balance sheet, income statement, and other financial statements and disclosures.
Fixed Income FundA fund that invests primarily in bonds and other fixed income securities, often to provide shareholders with current income.
Fixed Income SecuritiesInvestments with specified payment dates and amounts, primarily bonds that pay interest.
Front-End LoadAn upfront sales charge investors pay when they purchase mutual fund shares, generally used by the fund to compensate brokers. A front-end load reduces the amount available to purchase fund shares.
Fund FamilyA group or “complex” of mutual funds, each typically with its own investment objective, that is managed and distributed by the same company. A fund family also could refer to a group of collective investment funds or a group of separate accounts managed and distributed by the same company.
Fund of FundsA mutual fund, collective investment fund or other pooled investment that invests primarily in other mutual funds, collective investment funds or pooled investments rather than investing directly in individual securities (such as stocks, bonds, or money market securities).
Glide PathThe change over time in a target date fund’s asset allocation mix to shift from a focus on growth to a focus on income.
Global FundA fund that invests in stocks throughout the world, including the United States.
Group Annuity ContractAn annuity contract entered into between an insurance company and an owner for the benefit of a designated group, such as retirement plan participants.
Growth and Income FundA fund that has a dual strategy of growth or capital appreciation and current income generation through dividends or interest payments.
Growth FundA fund that invests primarily in the stocks of companies with above-average risk in return for potentially above-average gains. These companies often pay small or no dividends and their stock prices tend to have the most ups and downs from day to day.
Growth StockThe stock of a firm whose earnings are generally growing faster than the economy or market norm. Investment risk with growth stock tends to be high.
Guaranteed Interest AccountAn account within a fixed annuity or a variable annuity that is guaranteed by the insurance company to earn at least a minimum rate of interest while invested in the contract.
Guaranteed Investment ContractsInvestments generally issued by insurance companies or banks that pay a set interest rate over a set time period, with a promise to repay the principal at maturity. Risk is considered low if the contracts are issued by a financially sound organization. The issuer of the contract bears any risk associated with the securities underlying the contract. Also called Fixed Income Contracts.
Guaranteed Lifetime Withdrawal Benefit or Guaranteed Minimum Withdrawal BenefitA feature that may be offered under an annuity contract in which the insurance company promises an individual may withdraw a specified amount from an account, even if the account balance is reduced to zero: (1) for the life of the individual or the joint lives of two individuals (e.g., the individual and spouse); or (2) for a specified period of time.
Inception DateThe date that a fund began operations.
Income FundA fund that primarily seeks current income rather than capital appreciation.
Income StockCommon stock that pays out a relatively large portion of earnings as dividends, resulting in a high yield for investors.
IndexA benchmark against which to evaluate a fund's performance. The most common indexes for stock funds are the Dow Jones Industrial Average and the Standard & Poor's 500 Index.
Index Fund: BondA type of mutual fund or unit investment trust whose investment objective typically is to achieve approximately the same return as a particular bond index by investing in the bonds of issuers included in the index (or a representative sample). Because an index fund is “passively” managed, its fees and expenses are typically lower than those of an actively managed fund.
Index Fund: StockA type of mutual fund or unit investment trust whose investment objective typically is to achieve approximately the same return as a particular stock index by investing in the stocks of companies included in the index (or a representative sample). Because an index fund is “passively” managed, its fees and expenses are typically lower than those of an actively managed fund.
InflationThe overall general upward price movement of goods and services in an economy. Usually, U.S. inflation is measured by the Consumer Price Index for All Urban Consumers, which is computed monthly by the U.S. Department of Labor.
Inflation RiskThe risk that an investment will not generate a higher rate of return than the rate of inflation and that the investment will lose real purchasing power.
InterestAn amount charged or paid for borrowing or using money.
Interest-Rate RiskThe possibility that a bond’s or bond fund’s market value will decrease due to rising interest rates. When interest rates (and bond yields) go up, bond prices usually go down and vice versa.
International FundA fund that invests in stocks of companies outside the United States.
InvestmentA stock, bond, mutual fund, or other asset that offers investors the potential of profitable returns.
Investment AdvisorGenerally, a person or entity that receives compensation for giving individually tailored advice on investing in stocks, bonds, or mutual funds. Some investment advisors also manage portfolios of securities, including mutual funds.
Investment CompanyA company that issues securities and is primarily engaged in the business of investing in securities. Mutual funds, closed-end funds, and unit investment trusts are the three basic types of investment companies.
Investment ObjectiveThe goal that an investment fund or investor seeks to achieve (e.g., growth or income).
Investment RiskThe possibility of losing some or all of the amounts invested or not gaining value in an investment.
Joint and Last Survivor AnnuityAn annuity that provides periodic payments for the joint lives of two individuals with benefits payable upon the death of one individual to the surviving individual at, for example, 50%, 75%, or 100% of the original payment amount, depending upon the terms of the contract.
Large Capitalization (Cap)A reference to either a large company stock or an investment fund that invests in the stocks of large companies.
Large-Cap FundA fund that invests in the stocks of “large” companies (as measured by market capitalization, or the value of a company’s outstanding stock).
Large-Cap StocksStocks of companies with a large market capitalization. Large caps tend to be well-established companies, so their stocks typically entail less risk than smaller caps, but large caps also offer less potential for dramatic growth.
Life ExpectancyThe estimated age at which an individual is statistically likely to die. This value is taken from a standard mortality table based on gender and year of birth.
Lifecycle FundA diversified mutual fund that automatically shifts toward a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. Often called Target Date Fund.
Lifestyle FundA fund that maintains a predetermined risk level and generally uses words, such as “conservative,” “moderate,” or “aggressive,” in its name to indicate the fund’s risk level. Used interchangeably with Target Risk Fund.
LipperA leading mutual fund research and tracking firm. Lipper categorizes funds by objective and size and then ranks fund performance within those categories.
LiquidityThe ability to turn an asset into cash readily.
LoadA sales charge assessed on certain investments to cover selling costs. A front-end load is charged at the time of purchase. A back-end load is charged at the time of sale or redemption.
Managed AccountA portfolio of stocks or bonds owned by an individual and managed by (i.e., investment decisions are made by) a professional investment manager.
Management FeeA fee paid out of fund assets to the fund’s investment advisor or its affiliates for managing the fund’s portfolio, any other management fees payable to the fund’s investment advisor or its affiliates, and any administrative fees payable to the investment advisor that are not included in the “other expenses” category.
The value of a company’s outstanding stock, calculated by multiplying the current share price by the number of shares of stock owned by investors.
Market IndexA measurement of the performance of a specific “basket” of stocks, bonds, or other type of investment considered to represent a particular market or sector of the stock or bond markets or the economy.
Market RiskThe possibility that the value of an investment will fall because of a general decline in the financial markets.
Market VolatilityThe relative rate at which investment market prices move up and down.
MaturityThe date by which the issuer of a bond promises to repay the bond’s face value.
Mid Capitalization (Cap)A reference to either a medium sized company stock or an investment fund that invests in the stocks of medium-sized companies.
Mid-Cap FundInvests in the stocks of “mid-size” companies (as measured by market capitalization, or the market value of a company’s outstanding stock).
Mid-Cap StocksStocks of companies with a medium market capitalization. Mid caps are often considered to offer more growth potential than larger caps (but less than small caps) and less risk than small caps (but more than large caps).
Money MarketThe market in which large amounts of short-term funds are loaned and borrowed. Money market instruments include such investments as commercial paper, negotiable certificates of deposit, and Treasury bills. Investment risk is generally low.
Money Market FundA mutual fund that invests in short-term, high-grade fixed income securities and seeks the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price).
MorningstarA leading mutual fund research and tracking firm. Morningstar categorizes funds by objective and size and then ranks fund performance within those categories.
Mortality and Expense Risk ChargeA fee associated with an annuity contract, stated as a percentage of account value to cover the insurance company’s costs for insurance-feature risks it assumes under the contract.
MSCI EAFE IndexAn index known by an acronym for the Europe, Australasia, and Far East markets produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization. The index is a widely used benchmark for managers of international stock fund portfolios.
MSCI World IndexAn index of major world stock markets, including the United States. The index is a widely used benchmark for managers of global stock fund portfolios.
Mutual FundAn investment that combines money from shareholders and invests it in numerous securities, including stocks, bonds, and short-term money market instruments. As open-ended investments, most mutual funds continuously offer new shares to investors.
NASDAQThe National Association of Securities Dealers Automated Quotation, also called the “electronic stock market.” The NASDAQ composite index measures the performance of more than 5,000 U.S. and non-U.S. companies traded “over the counter” through NASDAQ.
Net Asset Value (NAV)A mutual fund’s per-share value, calculated by subtracting the fund’s liabilities from the value of its assets and dividing the result by the number of outstanding fund shares. Mutual funds calculate their NAVs at least once each business day.
New York Stock Exchange (NYSE)The oldest and largest stock exchange in the United States, founded in 1792.
No-load FundA mutual fund whose shares are sold without a sales commission and that does not charge a combined 12b-1 fee and service fee of more than 25 basis points or 0.25% per year.
Operating ExpensesThe costs a fund incurs in connection with running the fund, including management fees, distribution (12b-1) fees, and other expenses. Operating expenses are paid from a fund’s assets before earnings are distributed to shareholders.
Passive Management The process or approach to operating or managing a fund in a passive or non-active manner, typically with the goal of mirroring an index. These funds are often referred to as index funds and differ from investment funds that are actively managed.