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401(k) plan
An employer-sponsored retirement plan that lets employees save for retirement more effectively by allowing them to contribute money tax-deferred.  


Asset allocation
The process of spreading retirement money among different investment types.


Balanced funds
Funds that seek a balance of capital gain and income.

IOUs that a corporation or a government issue to help fund an aspect of its operation. In purchasing a bond, an investor lends money to the issuer for a set period of time. During that time, the investor receives interest payments. At the end of the lending period, when the bond "matures," the issuer gives the original payment amount to the investor. This original payment is the principal.
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Capital gains
The increase in the value of an investment, such as a stock.

Cash equivalents
Investments designed to protect money from losing value. Growth is not their primary goal. Over the long term, cash equivalents may pose inflation risk, which is the risk that inflation will outpace the growth of the investment.

Making money on the principal and its earnings. Compounding occurs when the investor reinvests the earnings from an investment into the investment.
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Direct Rollover
The process of rolling over an eligible distribution from a qualified retirement plan into another qualified instrument, such as an IRA or another employer's retirement plan.

The process of taking money out of a retirement plan account. While distributions usually take place at retirement, they may occur before retirement, in the form of a loan or a hardship withdrawal.

Spreading money among several investment types. The growth of savings in a diversified retirement plan does not depend on any one investment. Diversification lets the investor balance volatile investments (such as stocks) with more stable ones (such as bonds), and might smooth out the ups and downs of investing.

Money a company pays to its stockholders, typically from profits. The amount is usually expressed on a per-share basis.

Dollar-cost averaging
An advantage of investing in a retirement plan, dollar-cost averaging allows the investor to buy fewer shares of a mutual fund when the price is high and more shares when the price is low. Over time, this "averages" out the amount the investor pays per share.

Dow Jones Industrial Average
Also known as "the Dow," it averages the prices of 30 major industrial companies. If the averaged price of the thirty companies' stocks rises on a trading day, the Dow is said to be "up"; similarly, if the averaged price of the thirty companies' stocks falls, the Dow is said to be "down."
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The money that invested money makes. Earnings can come from dividends, interest, or capital gains.

Acronym for the Employee Retirement Income Security Act. Passed in 1974, ERISA protects the interests of participants in employee benefit plans and the interests of their beneficiaries.


Fund manager
Professional money managers who research and select the individual investments that make up a mutual fund.
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Government securities
Any debt obligation issued by the U.S. government or its agencies. The government insures some of its securities, such as Treasury bills.

Growth fund
A mutual fund whose managers attempt to make money from increases in the value of the stocks it holds, rather than through dividends.


Income fund
A mutual fund that is managed to provide income rather than capital gains. Also called bond funds, because they invest primarily in bonds.

The reduction in the value of money due to increases in the cost of living.

Inflation risk
Inflation risk is the possibility that increases in the cost of living will reduce the value of money. For example, if the inflation rate averages 4% annually, in 10 years, an investor would need about $148 to buy what $100 buys today.

To combat inflation risk, retirement savings should earn an annual return that is greater than the rate of inflation.

The money earned by an income investment, such as a bond.

Investment types
There are three major investment types in mutual funds-stocks, bonds, and cash equivalents.

A traditional IRA (Individual Retirement Account) is a tax-deferred retirement account in which the investor is allowed to save up to a certain amount a year.
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Large cap stock
Stock of a company that has a large market capitalization (over $5 billion).

How easily an investment can be turned into cash. Liquidity is the goal of money market funds.


Market capitalization
A company's market capitalization refers to the value of a company's outstanding stock. For example, if a company's stock price is $20 a share, and there are 10 million shares outstanding, that company has a market capitalization of $200 million. The investment industry groups companies by the size of their market capitalization.

Mid cap stock
Stock of a company that has a mid-range market capitalization ($1 to $5 billion).

Money purchase pension plan
A money purchase pension plan allows mandatory employer-based contributions of up to 25% of compensation (up to a maximum of $30,000 annually).

Mutual fund
An investment that pools money from many investors with mutual goals.
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Net asset value
The value of a share of a mutual fund.

Non-qualified deferred compensation plan
A retirement plan not officially recognized by the IRS that still allows participants to invest on a tax-deferred basis.


Usually a retirement plan that an employer funds entirely. Traditional pensions are becoming less common.

Refers to the holdings in a mutual fund, or in an investor's account.

Pre-tax savings
Contributions to a retirement savings plan that are deducted from an investor's paycheck before income taxes are withheld. Pre-tax savings enable the investor to pay less in current income taxes than required if the investor paid taxes first and then saved.

Profit sharing plan
Allows the employer to make flexible contributions of up to 15% of eligible compensation on behalf of eligible employees.

A document provided by a mutual fund company. A prospectus gives information about the fund's investment objectives and fees, and describes the risks involved.
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Qualified plan
A retirement plan that complies with all ERISA guidelines.


Rabbi trust
An irrevocable trust used to fund deferred compensation benefits. This employer-established trust is most commonly used to protect the fund against risks such as a change in control of the company or future management decisions involving compensation plans.

The process of moving money from one type of investment instrument to another to maintain a desired proportion of asset allocation.

Putting investment earnings back into an account, rather than withdrawing them, thus increasing the amount of money that generates interest or earnings.

Risk and return
The amount of reward (return) from any investment is related to the amount of risk (the potential positive or negative performance) of the investor is willing to accept.

Risk tolerance
The amount of potential positive or negative performance an investor is willing to take on.
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Another name for investments such as stocks or bonds. The name "securities" comes from the documents that certify an investor's ownership of particular stocks or bonds.

A unit of ownership, such as a share of a stock or a mutual fund.

Share price
The cost of a single unit of stock in a company. A company's share price may go up or down depending on various factors.

Small cap stock
Stock of a company that has a smaller market capitalization (less than $1 billion).

Standard & Poor's 500 Stock Index
A measure of the stock market based on the 500 largest stocks listed on the New York and American stock exchanges or traded over the counter.

Shares of ownership in a company. The value of a stock is the amount that investors are willing to pay for it. Company news, the overall market, and national economic news may affect stock values. Stock prices tend to go up and down more than other types of investments, but also have the highest potential for long-term growth.

Investors earn money from stock by selling it for more than they paid for it, or by receiving dividends. A dividend is a percentage of earnings that some companies pay to stockholders as a way of rewarding them for investing in the company's future.

Stock fund
A mutual fund that invests in stocks.
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Tax deferral
Permission or allowance for investors to postpone tax payments. Contributions to retirement plans and the investment earnings on those contributions are tax-deferred. Investors don't pay taxes on earnings until they withdraw money.

Tax-deferred compounding
Allowing the money that money earns to grow, tax-deferred, until withdrawal.

Time horizon
The amount of time that an investor expects to stay invested in a retirement savings plan before beginning to make withdrawals.

Treasury bill
Negotiable debt obligations issued and backed by the U.S. government.


An ERISA guideline stipulating that employees are entitled to their benefits from a pension fund, profit-sharing plan or Employee Stock Ownership Plan, within a certain period of time, even if they no longer work for their employer. Investors are always 100% vested in the money they put into their accounts. If an employer offers a match, it may take some time to become fully vested in those funds. Many employers have a five-year vesting schedule, in which an employee is vested incrementally over a five-year period. After five years, an employee of such a company would be 100% vested in all employer-matched dollars.

The degree to which securities, such as shares of a mutual fund, move up or down in value.
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