Commonly Used 401k Terms
Understanding the definition of “401K Rollover” can prove to be somewhat confusing to the average person. There is a complex array of rules and regulations surrounding it but at the very core a 401k rollover involves a change in the administrator of your plan.
401K plans are what are defined as group plans. What this means is an employer offers a retirement plan to his or her employees that, by rule, all must be eligible to participate in. A company offers a retirement plan to its employees for two basic reasons; one is to help attract the best possible work force it can. Often a company will offer a salary to a potential employee but also in addition to that a “benefit package”. Traditionally that package would consist of things like health coverage, sick days, vacation and some sort of retirement plan. Two, is so that the owners of the company can have a tax free way to contribute funds into a retirement plan. Company owners, cannot do this unless they open up the very same plan to all of their employees.
Here are definitions of some key terms you should know when discussing your plan with a financial advisor.
- The administrator of your plan is not your employer, it is the financial institution that has control for all of the funds that are in that companies group plan. The whole concept behind contributing to a plan is that someone is then going to take that money and invest it so that your funds are continually growing.
- Mutual Fund
- This is the most common form of investment vehicle for retirement funds. A mutual fund is a wide mix of stocks that are purchased with the funds, and then placed in a portfolio which is then managed by investment professionals. The basic principal at work here is that by having a wide variety of stocks, you do not put all your eggs in basket and become vulnerable to a dramatic downturn of one company, or even market sector.
- Employee contribution
- This is the money that the employee deposits into the plan. With most plans the company does not fully fund the plan, but the employee has money deducted from his payroll each week and placed into the plan.
- Employer Contribution
- This is the money that the employer pays into each individual employees plan. This amount the employer would contribute is based upon a percentage of the amount the employee puts in. It is often described as a matching contribution.
It is always a good idea to be as knowledgeable as possible about financial matters even though there is someone else taking care of it for you. Most people don’t have much involvement in their retirement plans. However if you are faced with moving your money into a new plan, you want to make the best choice you can.
The NASDAQ has a nice site that offers definitions on many financial terms you can visit.
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