Financial Terms Glossary

401(a) plan:  The numbers and letter 401(a) refer to the section of the Internal Revenue Code that governs qualified retirement plans. See also defined contribution plan. It is a defined contribution retirement plan. For more information on the features of the CRA 401(a) plan, click here

457(b) plan: The numbers and letter 457(b) refer to the section of the Internal Revenue Code that governs qualified deferred compensation plans. Section 457 deferred compensation plans are available to state and local governments. Eligible employees may elect to defer a portion of their income until a future date, usually retirement. Income taxes on amounts deferred and investment return are postponed until a distribution is received. In some cases the employer may also make contributions to a 457(b) plan. For more information on the features of the CRA 457(b) plan, click here

Annuity: An insurance company contract that provides tax-deferred growth of an investment. An annuity contract also offers the investor (policy holder) guaranteed payments from the contract for a specified numbers of years, specified amount or over a lifetime. The insurance company guarantees the amount and assumes all of the investment risk.

Asset allocation: Dividing your investments among the different classes of available options. For example, you may want to divide the portion of your investment committed to stocks into different types of stock funds, such as large-cap, small-cap, foreign, etc.

Balanced fund: A mutual fund that maintains a constant mix of stocks, bonds and cash equivalents. The fund manager(s) will make adjustments to the percentage invested in each of the three asset classes based on the current and projected economic climate.

Beneficiary: The person or persons designated to receive the balance of the participant’s account in the event of death. Also referred to as “primary beneficiary.” See also contingent beneficiary.

Bond: A bond is essentially a loan or a debt issued by corporations, governments or municipalities in an effort to raise money. The issuer promises to repay all of the money borrowed plus a specified rate of interest by a predetermined date.

Capital appreciation: The increase in value of an investment such as a stock, stock mutual fund, real estate, etc. When you invest for capital growth, you hope to sell your investment in the future, for more than your original purchase price. Also referred to as “capital growth.”

Catch-up provision: A provision in Section 457 of the Internal Revenue Code that allows participants in a 457(b) plan a (one-time) three-year window to “catch-up” for eligible amounts not deferred during previous years. This provision allows deferring up to double the annual limit for three consecutive calendar years.

Contingent beneficiary: The person or persons designated to receive the balance of the participant’s account in the event of the primary beneficiary pre-deceasing the participant.

Contribution: Payment made by the participant and/or employer for deposit into any of the CRA retirement savings plans.

Daily valuation: Calculating the value (valuation) of each participant’s investment options at the close of each business day.

Default: When a debtor (such as the issuer of a bond) fails to make scheduled payments of interest and/or principal to the creditor (such as a bond-holder).

Defined contribution plan: A retirement plan that provides an individual account for each employee participant in which the contribution amount is defined. The retirement benefit is ultimately determined by the ending account balance, which comprises employer and employee contributions, investment return and expenses. For more information on the features of the CRA 401(a) plan, click here [LINK TO 401a Your Plans Section].

Depreciation: The decrease in value of an investment such as a stock, stock mutual fund, real estate, etc. When you invest for capital appreciation (growth), you hope to sell your investment in the future, for more than you paid for it. However, you assume the risk that the value of your investment may decline (depreciate).

Distribution: Receiving money from your retirement savings account(s).

Diversification: Dividing your money among different classes of investments such as stocks, bonds and cash equivalents. The purpose is to reduce risk by limiting the amount invested in any one asset class.

Dividend: When a company pays a portion of their profits to the shareholders or stockholders, the investment return, or income, is referred to as dividends. A mutual fund’s dividends are based on the income received by the fund from all the fund’s investments.

Dollar cost averaging: Investing the same amount of money in the same investments at fixed intervals, often monthly. If the price rises, you buy fewer shares; if it drops, you acquire more shares. Dollar cost averaging is a long-term strategy that can result in, but does not guarantee, a lower average cost per share.

Dow Jones Industrial Average: A stock market index that comprises frequently traded stocks which provide investors with a general idea as to the investment performance of some of the largest domestic companies.

Fund transfer: A transfer of existing assets from one investment option to another investment option. This type of transaction does not affect the investment allocation of future contributions.

Guaranteed investment contracts (GIC): Guaranteed investment contracts are investments that function similarly to Certificates of Deposit, except they are issued and contractually guaranteed by insurance companies. Like a CD, the GIC pays a stated interest rate for a specified period of time. GICs are often found in stable value funds in retirement plans, like the CRA book value fund.

Growth fund: A mutual fund that invests primarily in stocks of companies that are expected to produce higher than average growth in earnings, usually with little or no emphasis on dividend income.

Income fund: A mutual fund that may invest in stocks, bonds or other securities that seek income from dividends or interest. The primary source of investment return from an income fund is from the receipt and reinvestment of income dividends and/or interest.

Index fund: A mutual fund that seeks to replicate the investment characteristics of a market index. An index fund is designed to perform as closely as possible to the performance of a designated index.

Inflation: The increasing cost of goods and services over time. Inflation reduces buying power.

Investment allocation change: A change in the allocation of how your future contributions will be invested. An investment allocation change does not affect any of your existing fund balances as you would when requesting a fund transfer.

Individual Retirement Account (IRA): An individual retirement account or annuity that is designed to encourage individual voluntary savings by providing certain tax-favored features. Contributions may or may not be tax-deductible depending on income, marital status and other factors. All investment return in an IRA is tax-deferred.

Minimum distribution: When a retirement plan participant reaches the age of 70 1/2, the IRS imposes a minimum required annual distribution amount from the plans. The minimum distribution amount is based on the account balance and life expectancy of the participant and/or beneficiary. This rule does not apply until the participant terminates employment or retires.

Money market: The market in which short-term debt instruments, or loans, are traded. One common form of money market securities is commercial paper. These loans are made to reputable, established corporations or governments with very high credit ratings. Therefore, the rates of return, which are derived from the interest paid on these short-term loans, is generally very low.

Mutual fund: A group of securities, such as stocks or bonds, that is managed by a team of professional investment advisors for the benefit of a pool of investors. When you invest in a mutual fund you are purchasing shares, or pieces, of the fund, thereby owning a portion of all the fund’s investments. As a mutual fund shareholder, you will share in the fund’s gains or losses.

Net asset value (NAV): The value of one share of a mutual fund. NAV is calculated at the end of each trading day by totaling the market value of all securities owned by the fund, plus any cash or other assets, then subtracting liabilities and expenses. The net value of the fund is then divided by the number of shares outstanding. The end result is the value, or worth, of one share of the fund. The fund’s NAV may increase or decrease every day based on the performance of the underlying securities. A fund’s NAV is synonymous with a fund’s price per share.

Pick-up: A term used in the Internal Revenue Code to describe the tax treatment of mandatory employee contributions to a 401(a) plan. When the employer elects to structure the plan with the “pick-up” provision, all mandatory employee contributions are made on a pre-tax basis. See also pre-tax contribution.

Plan administrator: An association or company responsible for record-keeping, investment of assets, participant and employer account statements, legal and tax compliance and any other requirements for the administration of a retirement savings plan.

Portfolio: More than one investment, such as stocks, bonds, real estate, etc., held by an individual investor or institution.

Pre-tax contribution: Money deducted from your paycheck and invested before federal and state income tax is withheld on the compensation. When you invest on a pre-tax basis, you reduce your current federal and state income taxes, because the pre-tax contribution reduces your taxable compensation. Also referred to as “before-tax.”

Principal: In the case of an investment, “principal” is the amount invested, such as contributions. In the case of a loan, “principal” is the amount borrowed. When you take out a loan, the lender is investing their principal in your loan. The lender expects to receive back from you, all of their principal and the agreed upon interest.

Prospectus: A document filed with the Securities Exchange Commission that provides details of a mutual fund or other security regarding investment objective, strategies, management, legal proceedings, fees, etc. A current prospectus for any of the mutual funds in your CRA plan is available through CRA at any time.

Qualified plan: A retirement plan that meets the qualification requirements of Internal Revenue Code 401(a). CRA’s 401(a) is a money purchase qualified plan. The CRA 457(b) is not a qualified plan.

Rebalance: To reposition the assets in your account to reflect the original investment allocation. Rebalancing may be necessary because some of your investments will grow faster than others. For example, if you invested 50% of your money in a stock fund and 50% in a bond fund for one year, during a period that stocks significantly out-performed bonds, your allocation to stocks would be greater than 50% at the end of the year.

Risk: The potential for an investment to lose money or decline in value. In the investment industry, “risk” is often measured by volatility, which is the historical fluctuation in value of an investment over specified period of time. See also volatility.

Risk tolerance: An investor’s ability to tolerate the fluctuations (increase/decrease in value) of investments. Investors with a low risk tolerance will feel more comfortable with more conservative investments with low volatility. Whereas, an investor that is not as concerned with short-term fluctuations in an investment, knowing that the long-term prospects for growth may be good, has a high risk tolerance.

Rollover/transfer: A request to transfer assets from an existing retirement plan to another. For more information on rollovers and transfers, click here.

S&P 500: The Standard & Poor’s 500 stock index. A leading stock market indicator that measures the investment performance of the 500 largest available domestic stocks. Standard & Poor’s, a subsidiary of McGraw-Hill, Inc., also provides ratings services for bonds, stocks, insurance companies and other financial data.

Security: Another term for an investment instrument such as stock, bonds, money markets or other similar investment.

Share: The portion of a fund, or portion of ownership in a corporation, in the case of a mutual fund. In the case of a stock, a share is the portion that a person or institution owns. When you make contributions to one of the CRA retirement savings plans and elect to invest in a mutual fund, you are purchasing shares, or pieces, of that fund every time a contribution is made. The value of the shares (see net asset value) will fluctuate based on the value of the underlying investments of the fund.

Socially responsible fund: A mutual fund that purchases securities (stocks, bonds, etc.) issued by corporations and governments that have been screened to meet certain social criteria. Generally, these funds seek to purchase securities from companies that don’t derive revenues from the production of products and services such as alcohol, tobacco, firearms, gambling, etc. Additionally, these funds will seek out companies with outstanding employee benefits plans, strong community involvement, scholarship programs, female and minority executives, etc.

Stock: Stock is issued by corporations as a means of raising capital, or money, for the corporation to invest in an effort to make the company grow. When you buy stock in a company you are trading your money for a piece, or share, of ownership in the company. As a stockholder, or partial owner, you share in the company’s profits and losses. When the value of the company increases and decreases, the value of your investment increases and decreases.

Surrender charge: A term generally associated with investments provided through insurance companies. When an investor elects to surrender, or terminate, the contract within a specified number of years, the insurance company may impose a penalty, or charge, on the investor. Also referred to as a “contingent deferred sales charge,” meaning the sales charge is deferred, contingent upon the investor terminating the contract at some point in the future. Neither CRA, nor any of its investment providers impose surrender charges or contingent deferred sales charges on participants in the plan(s).

Target date portfolios: Target date portfolios are aimed at people planning for retirement.  Also known as risk or age-based portfolios, they are mutual funds or collective trust funds designed to provide a simple investment solution through a portfolio in which the asset allocation mix becomes more conservative as the target date (usually retirement) approaches. They have special appeal for retirement accounts because they offer a lifelong managed investment strategy that should remain appropriate to an investor’s risk profile. Research suggests that age is by far the most important determinant in setting an investment strategy. Thus, target date or age-based portfolios are particularly attractive as default investment lineups for retirement accounts. They do not offer a guaranteed return but offer a convenient multi-asset retirement savings strategy through a single outcome-oriented fund.

Read more about CRA target date portfolios here

Tax-deferred: To defer, or postpone, income tax liability. A tax-deferred investment allows the income tax liability on investment return – and in some case, the principal (see pre-tax contribution) – to be postponed until the investment begins distribution, usually at retirement. This strategy can make an investment grow faster than an after-tax investment because there are no deductions for taxes each year, thereby keeping more money invested.

Tax-free: Investment return is free from any future taxation. This usually refers to the tax-free earnings available on tax-free municipal bonds, which are not used for tax-deferred retirement accounts.

Time horizon: The length of time your money can remain invested. When considering time horizon for a retirement investment, you should also include the duration of time when your account is being distributed.

Vesting: Ownership of contributions and earnings in a retirement plan provided from employer funding.

Vesting schedule: The scheduled rate at which participants earn ownership of employer contributions and earnings in a retirement plan. The vesting schedule is established and amended by the employer in the Plan Adoption Agreement.

Volatility: A measurement of how much the value of an investment changes, either increasing or decreasing in value over short periods of time. Investments such as stocks and stock mutual funds are considered to have high volatility, whereas, bonds and other fixed-income investments like stable value funds and bank savings accounts have low volatility.

Voluntary after-tax: A means of contributing to the CRA retirement plan that allows participants to voluntary contribute up to 10% of their earnings on an after-tax basis. Upon distribution, there will be no tax liability due on contributions. However, the investment return will be taxable as ordinary income upon distribution.

Yield: A method of determining the investment return on a particular investment. An investment’s yield is calculated by dividing the dividend or interest by the amount paid or invested. With bonds, the coupon rate of interest divided by the purchase price, is the bond’s current yield. For stocks, yield is determined by looking at the percentage of the stock’s current price that is paid to the shareholders in the form of dividends.