Private Wealth Management

Glossary of Terms

Please use the glossary below.

A defined contribution (DC) plan is a retirement plan that’s typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. In addition, the sponsor company has the option to match a portion of employee contributions as an added benefit.

Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods.


“Interest on interest,” or the power of compound interest, is believed to have originated in 17th-century Italy. It will make a sum grow faster than simple interest, which is calculated only on the principal amount.


Compounding multiplies money at an accelerated rate and the greater the number of compounding periods, the greater the compound interest will be.

A plan sponsor is a designated party—usually a company or employer—that sets up a healthcare or retirement plan, such as a 401(k), for the benefit of the organization’s employees. The role of the plan sponsor is to act as a fiduciary to the Plan which includes determining membership parameters, investment choices, and in some cases, providing contribution payments in the form of cash and/or stock.

A fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity such as managing and overseeing a company sponsored 401(k) Plan.

The basic responsibilities of a retirement plan fiduciary include:

    • Acting solely in the interest of the plan participants and their beneficiaries
    • Acting for the exclusive purpose of providing benefits to plan participants and their beneficiaries and defraying reasonable expenses of the plan
    • Carrying out duties with the care, skill, prudence, and diligence of a person familiar with the plan
    • Following the plan documents
    • Diversifying plan investments

401(k) Plan advisors help employers develop and maintain a plan that meets their needs, and they help participants make important decisions about saving for retirement, including investment guidance, financial wellness counseling , and financial planning.  The Financial advisor also acts as a co-fiduciary with the Plan Sponsor in managing the regulatory requirements of the Plan.

When a 401(k) plan is established, the money that plan participants contribute must be held securely. It’s the job of the custodian to safeguard the assets of the plan and the workers participating in it. The duties of the custodian typically include:

    • Allocating earnings and losses to plan participant accounts accordingly
    • Certifying balances of plan assets
    • Investing contributions to the plan as directed
    • A 401(k) custodian may also assume record-keeping duties, though these may be handled separately. The record-keeper’s job is to create a paper trail of transactions, including balances, contributions, and the purchase or sale of assets. The custodian of 401(k) reports to the plan’s trustee, who is able to control plan assets.

A Third-Party Administrator (or TPA) is an organization that manages many day-to-day aspects of your employee retirement plan.

A TPA performs responsibilities such as:

    • Designing retirement plan documents
    • Preparing employer and employee benefit statements
    • Ensuring the plan is in compliance with the IRS non-discrimination requirements
    • Preparing annual returns and reports required by the Internal Revenue Service (IRS),  the Department of Labor (DOL) or other government agencies.

When can an employee begin participating in the 401(k) plan?

    • There is typically a “waiting period” before a new employee can contribute from their wages to the Plan.
    • There is typically a “waiting period” before an employee can receive contributions from the employer.
    • The “waiting period” is spelled out in the Plan’s legal document call the Adoption Agreement.
    • Participant assets from former defined contribution plans are immediately eligible for rollover to new employer on their date of hire.

Automatic enrollment in a 401(k) plan states that employees will be automatically enrolled in the plan unless they elect otherwise.  The Plan’s Adoption Agreement specifies the percentage of an employee’s wages that will be automatically deducted from each paycheck for contribution to the plan in each participant’s individual account.  Deductions from participant wages are also referred to as “wage deferrals.”

A “participant-directed” 401(k) plan allows a plan participant and their employer to make certain legally determined contributions to the participant’s plan account.  The participant is ultimately responsible for the decisions regarding how those contributions are managed and invested on their own behalf.

Pre-tax 401(k) accounts provide a tax break now. Your contributions are not taxed at the time of investment. Instead, taxes are paid on withdrawals, including any earnings at retirement. Getting a tax break at the time of investment will leave more money in your pocket now — money that you can invest, save, or spend.

After-tax/Roth 401(k) Plans allow participants to make contributions to their employer-sponsored 401(k) on an after-tax basis. This means the government takes tax out of their payments before they’re put into their account.  Since the participant’s taxes on their wage deferrals are paid at the time they are deducted, the earnings on these contributions accumulate TAX FREE over the work life of the participant, with no taxes owed at the time of distribution.

Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings vehicles. The IRS adjusts retirement plan contribution limits annually for inflation.

A discretionary matching contribution allows the employer to decide which percentage of employee deferrals to match and provides the employer with the flexibility to adjust matching amounts as business needs change.  The formula for determining the matching contribution is typically based on a percentage of the participant’s contribution up to a percentage of the participant’s annual wages.  (Example:  An employee earns $50,000 per year and contributes 6% of their wages – $3,000 – to their 401(k) Plan account.  The employer might then match up to 50% of the employee’s contribution  – $1,500 – up to a maximum of 6% of the employee’s wages.  This example calculates to a 9% Savings Rate as well as a 50% return on the participant’s investment.  The catch…to receive this “free money” matching contribution one must contribute to the Plan from their wages.)  All Employer Contributions are contributed Pre-tax!


Note:  The employer matching contributions may be subject to a “Vesting Schedule.”

Nonelective contributions are funds employers choose to direct toward their eligible workers in employer-sponsored retirement plans regardless if employees make their own contributions. These contributions come directly from the employer and are not deducted from employees’ salaries.  All Employer Contributions are contributed Pre-tax!


Note:  The employer non-elective contributions may be subject to a “Vesting Schedule.”

Vesting refers to the ownership of the contributions made into a 401(k) by employees and their employers. Employee wage deferrals and rollovers are always 100% vested.  Discretionary Employer contributions, however, may be subject to a Vesting Schedule. A vesting schedule outlines how much employees own of the money in their employer contribution retirement account. Vesting is based on time of service from an employee’s date of hire as well as hours of service performed in a given Plan Year.  Employees may vest a certain percentage of their retirement account each year based on hours worked. Taking the time to understand what vesting means and how it works can help employees better plan for their financial future.

A qualified distribution is a withdrawal from a qualified retirement plan such as a 401(k) plan, 403(b) plan, or IRA. Qualified distributions come with tax and penalty conditions set by the IRS to keep investors from using funds for purposes other than retirement.  The following are typical examples of “qualified distributions:

    • Death
    • 100% Disability
    • Termination of Employment

An in-service distribution occurs when participant withdraws assets from their 401(k)retirement plan while still employed.  In-service distributions are spelled out in the Plan’s legal document and typically include:

    • Age 59-1/2
    • Economic Hardship as defined in the Plan document per the Internal Revenue Code.
    • Participant Loans

The Employee Retirement Income Security Act (ERISA) requires plan administrators to give to participants and beneficiaries a Summary Plan Description (SPD) describing their rights, benefits, and responsibilities under the plan in understandable language.  The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan and how to file a claim for benefits.

For 401(k)s, your beneficiary is the person or organization you choose to receive the assets in your 401(k) account if you were to pass away. There are two types of beneficiaries you can name: Your primary beneficiary is the first beneficiary you want to receive your 401(k) assets at your death.  If the participant is married, Washington law requires that the spouse must be designated as the Primary Beneficiary unless the spouse consents, in writing, in front of a Notary or a plan trustee, that an alternate primary beneficiary has been designated.  Any questions regarding other potential beneficiary arrangements should be referred to a legal agent such as an Estate Planning attorney.


Your secondary or contingent beneficiary(ies) can be multiple and diverse and stand as a backstop in the event that you and your primary beneficiary pass away at the same time. 

What Are Stocks? A stock, also known as an equity, is a “security” that represents the ownership of a fraction of the issuing corporation. Units of stock are called “shares” which entitles the owner to a proportion of the corporation’s assets and profits equal to how much stock they own.

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

A mutual fund is a pooled collection of assets that invests in stocks, bonds, and other securities. When you buy a mutual fund, you get a more diversified holding than you would with an individual stock or bond.

Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor’s effort to invest regularly.  401(k) Plans are ideal vehicles for taking full advantage of dollar cost averaging.

    • Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.
    • Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.
    • By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices.
    • Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.
    • Beginning and long-time investors can both benefit from dollar-cost averaging.

Target-date funds are structured to maximize the investor’s returns by a specific date. Generally, the funds are designed to build gains in the early years by focusing on riskier growth stocks, then they aim to retain those gains by weighting towards safer, more conservative choices as the target date approaches.

    • A target-date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for a predetermined time frame.
    • The asset allocation of a target-date fund is typically designed to gradually shift to a more conservative profile so as to minimize risk when the target date approaches.
    • The appeal of target-date funds is that they offer investors the convenience of putting their investing activities on autopilot in one vehicle.
    • Target-date funds usually mature in 5-year intervals, such as 2035, 2040, and 2045.

Risk-based asset allocation models provide an easy way to allocate your investments along a spectrum from conservative to aggressive. The more cash and bonds a model holds, the more conservative it is. The more stocks a model holds, the more aggressive it is.

A do-it-yourself, self-directed 401(k) Plan investment strategy, allows you to invest as you see fit. You can do your own research and create your own personal portfolio from a well-diversified and pre-determined list of mutual funds rather than following “the crowd.”  Keep in mind that this approach puts the responsibility on the participant to make their own modification to their investment choices when market conditions warrant adjustment.

 The day-to-day operation of a 401(k) plan involves expenses for basic and necessary administrative services, such as plan recordkeeping, accounting, legal, and trustee services. A 401(k) plan also may offer a host of additional services, such as telephone voice-response systems, access to customer service representatives, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation, and online transactions.

By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted.

In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

A 401(k) rollover is when you take funds out of your 401(k) account and move them into another tax-advantaged retirement account. You can roll a former employer 401(k) over into an individual retirement account (IRA) or into another 401(k) Plan, most commonly when you get a new job with a new retirement plan.  When done correctly, the funds move without any tax on the rollover funds.  This process provides the opportunity to consolidate funds under one retirement plan.  A licensed Financial Advisor can provide guidance for embarking on the process.