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Glossary

Investing

General

Active Money Management

Active money management is a strategy whereby a single manager (or a team) uses various analytical tools and her own judgment to determine the securities in a portfolio, seeking to outperform the market. The manager(s) decides when to buy, hold or sell. Due to the human element involved, funds with active management typically have higher fees than those with a passive investment strategy.

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Asset Allocation

Refers to the actual distribution of a portfolio's investments among different asset classes such as equities (stocks), fixed income (bonds), cash, and alternative investments. Further subdividing, common equity asset classes are large-cap, mid-cap, small-cap, and international stocks.

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Debt Markets

The systems through which debt securities such as corporate, government and municipal bonds are traded, facilitating the transfer of capital from savers to issuers or organizations who need capital for projects, expansions, and ongoing operations.

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Diversification

The practice of spreading risk over a wide selection of different types of investments such as domestic and foreign stocks, bonds, commodities and real estate in order to reduce the risk in an overall portfolio. If a portfolio is properly diversified, no matter what the economy does some assets will perform well, decreasing the chances that the overall portfolio will incur substantial losses at any given time. Over time, a diversified portfolio will provide better returns with lower risk.

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Equity Market - aka "stock market"

The system of exchanges and over-the-counter (OTC) markets through which shares of company stock are issued and traded. It is a vital institution of a market economy because it encourages investment in corporate securities, giving companies access to capital and investors an opportunity to earn income.

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Fundamental Analysis

The analysis of a company's underlying financial strength and actual business performance in terms of sales, earnings, liabilities, and other aspects of a company's financial statements with an eye towards determining growth potential and the true value of it's stock.

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Large Capitalization (Large Cap)

Companies which have a Market Capitalization of $10 billion or more (approximations, definitions vary by source). Please see the definition of Market Capitalization.

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Market Capitalization

The measure of a company's total value. It is estimated by determining the cost of buying an entire business in its current state. It is the total dollar value of all outstanding shares. It is calculated by multiplying the number of shares outstanding by the current market price of one share.

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Micro Capitalization (Micro Cap)

Companies which have a Market Capitalization below $250 million (approximations, definitions vary by source). Please see the definition of Market Capitalization.

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Middle Capitalization (Mid Cap)

Companies which have a Market Capitalization between $2 billion and $10 billion (approximations, definitions vary by source). Please see the definition of Market Capitalization.

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Passive Money Management

An investing strategy that mirrors market indexes and does not attempt to beat the market, rather it believes in efficient markets. In Efficient Market Theory once information becomes public the new information is incorporated into the pricing of securities immediately. Instead of focusing on "beating the market," a passive strategy attempts to control fees and costs of investing. This is the opposite of Active Money Management.

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Portfolio

The collection of different investments by which an investor aims to make a profit while trying to retain the principal (invested) amount, and can include any variety of stocks, bonds, mutual funds, ETfs, derivatives, real estate, or alternative investments though most retirement portfolios contain more of the former than the latter.

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Principal

The amount borrowed or invested as distinct from income (interest, dividends, or capital gains) derived from it

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Small Capitalization (Small Cap)

Companies which have a Market Capitalization between $300 million and $2 billion (approximations, definitions vary by source). Please see the definition of Market Capitalization.

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Technical Analysis

The analysis via charts and graphs of past movements in the prices and trading volume of stocks, bonds, and other financial instruments with an eye towards predicting future price movements.

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TRS

An acronym for Teacher Retirement System, which may have a different name in your state. The acronym in our glossary is used also to include the Public Employees Retirement System.

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Investments

12b-1 Fees

Annual fees charged by a registered investment company for marketing and distribution costs. Fund shareholders pay these fees. A majority of these fees are paid to agents and broker dealers as commissions.

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Balanced Funds

A fund which automatically rebalances to a predetermined asset allocation. An example would be a fund which holds 60% in stock, 30% in bonds, and 10% in cash. As the market goes up and down the fund will automatically adjust the holdings to the 60/30/10 allocation. Rebalancing a portfolio on a regular basis automatically results in buying more when prices are going down and selling more when prices are going up.

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Bond (Debt Obligation)

A Bond is a debt issuance. The coupon of the bond is the interest earned by the investor. Loss is limited to the value of the bond. Gains are limited to the coupon (interest payments). Bonds can be investment grade or high yield junk bonds. The better the credit worthiness of the issuer, the lower the coupon interest rate and vice versa.

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Bond Funds

A fund made up of a portfolio of bonds. A Bond Fund has an investment objective like stock Mutual Funds. It can be low risk or high risk, and short-term and long-term, depending on the creditworthiness and time until maturity of the bonds held. Unlike individual bonds held to maturity (that have adequate creditworthiness), there is a risk of loss of principal with Bond Funds.

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Bond Ladder

A portfolio of individual bonds designed to hold each bond to maturity. The portfolio is structured so that bonds with different maturities will mature over an extended period of time. By building a ladder of varying maturities (including long and short term) the overall return can be higher and an income stream is created. With higher rates of return, the potential risk may also rise. The income can be used for living expenses, particularly with retirees, or used to reinvest in additional bonds.

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Contingent Deferred Sales Charge (CDSC)

A charge imposed when redeeming a "B" share of a Mutual Fund. This charge is to compensate the individual or company selling the fund shares. A CDSC, Contingent Deferred Sales Charge, can also be called a Back-end Load. The CDSC will usually be lowered gradually over time. Typically the CDSC will be about 3 to 5 percent declining over 3 to 7 years. The annual fees associated with a B share typically are higher than with A shares. C shares typically also have a CDSC.

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Corporate bond

A debt security issued by a corporation to raise capital and purchased by investors to earn interest. Corporate bonds are rated by bond rating firms such as Moody's or S&P and often pay higher interest rates than government or municipal bonds, because they tend to be riskier. The backing for a bond is usually the financial stability / payment ability of the issuing corporation.

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Emerging Market Funds

A fund which focuses on companies in developing countries. Because of the inherent instability of developing markets these investments carry very high risk.

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Equity Indexed Annuities (EIA)

An investment vehicle offered by an insurance company which is categorized as a type of Fixed Annuity. An insurance company invests a majority of the EIA funds in the same investments as a Fixed Annuity. The remaining balance is used to purchase call options on a particular equity index (e.g., the S & P 500 Index). If the stock market goes down, it does not affect the value of the policy, because the actual index is not owned by the policyholder. If the market goes up, the call options become more valuable and a higher return (partially based on the index performance) can be credited to the policyholders. An EIA does not participate in dividends from the companies in the equity index. (Dividends have made up a significant portion of the returns associated with some indicies, such as the S&P 500 Index.) EIAs are very complicated investments which can provide for no investment losses and the potential for partial index investment gains. Most policies have Surrender Charges to withdraw funds (see the Surrender Charges definition). The sale of EIAs as promising "stock market returns with no risk" has been criticized by regulatory agencies as misleading.

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ETF

An Exchange Traded Fund, as the name suggests, is a security like a mutual fund in that it is a basket (fund) of diversified stocks, but differs in that it trades like a stock on an exchange with price changes throughout the trading session. ETFs can be sold short or bought on margin, and investors can purchase as little as one share. Many ETFs track an index, are passively managed, and have lower expense ratios than the average mutual funds.

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Expense Ratio

The expense charged by a Mutual Fund for operating costs associated with running the fund. This includes administrative expenses, marketing and distribution costs (see 12b-1 fees), and fund manager compensation. These expenses can range from under .15% annually to over 3.00% annually depending on the type of share class, investment objective, and fund family.

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Fixed Annuity

An investment vehicle offered by an insurance company in which the company (a) guarantees the return of principal in the policy plus a guaranteed interest rate and (b) pays a "declared" interest rate based on current company returns. An insurance company generally bases its interest rate on the earnings of the general assets of the company. This usually includes high quality mortgages and intermediate term bonds. Fixed annuities typically do not have administrative fees. The insurance company makes money on the difference between what the investments earn and what is paid out to policyholders. It is difficult to determine what this difference is because it is not disclosed and is set by the insurance company. Most policies have Surrender Charges to withdraw funds (see the Surrender Charges definition).

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Front-End Sales Load

A charge imposed on each share purchased when buying an "A" share of a Mutual Fund. This charge is to compensate the individual or company selling the fund shares. A Front-end Sales Load is limited to 8.5% and is typically 3 to 5 percent.

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Growth Funds

A fund which focuses on companies which are believed to have growth potential. Usually a growth company will spend more of the company profits on internal company investment to grow the company.

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Guaranteed Period Annuity (TRS)

A reduced annuity payment made payable for a guaranteed minimum period of time. The Standard Annuity benefit is reduced based on the member's age and period chosen. The annuity payment is paid to the retiree throughout their lifetime; however, if the retiree dies before the guaranteed number of payments have been made a beneficiary will receive the remaining payments. TRS allows members to choose between a 5 and 10 year guaranteed period.

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Index Funds

A fund that attempts to mimic a particular index. The most common example is the S & P 500 Index. There are hundreds of indices available. These funds are not Actively Managed.

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International Funds

A fund which focuses on companies which are based outside of the United States. There can be increased risks associated with non-US companies. However, in a global economy there can also be significant risk in not be adequately diversified.

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Life Cycle Funds (Target Funds)

A fund which automatically will change the investments and allocations to lower risk as time progresses. An example would be a fund designed to provide funds in 2030: In 2010 the allocation is 80% stocks and 20% bonds. In 2020 the allocation is 60% stocks, 30% bonds, and 10% cash. In 2030 the allocation is 10% stocks, 50% bonds, and 40% cash.

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Money Market Funds

A fund that has only short term investments which can be considered as cash or cash equivalents. Very low risk. Unlike most types of Mutual Funds in which the share value changes with the underlying value of the investments held by the fund, each share in a Money Market Fund is priced at a value of $1.00 and earnings are credited to this.

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Mortality & Expense Charge (M & E)

A annual fee charged by an insurance company in a Variable Annuity contract. This fee covers the cost of providing a guaranteed return of principal in the event of the policy owner's death.

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Municipal Bond - aka "muni"

A debt-security issued by a state, municipality, or county to finance its operations or projects. Interest earned on a muni is usually free of federal income taxes as well as from most state and local taxes. The backing for a muni is either the full taxing power of the government (general obligation bond) or based on the revenue generated from a financed project (revenue bond).

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Mutual Fund

An investment vehicle offered by a registered investment company. A Mutual Fund is a pool of money which is invested for fund holders by the investment company. Each fund has a stated objective for investment (growth, international, small capitalization, technology, etc). A Mutual Fund will also typically invest in many different securities to lower the risk associated with investing through diversification. Some Mutual Funds will attempt to match the performance of an index, while others try to "beat the market" through analysis and better investment selection. There are over 30,000 different mutual funds. Each fund has expenses for operations, marketing, and transactions. Mutual funds are sold in many different share classes. For example, A shares charge a Front-end Sales Load and B shares charge a higher Expense Ratio and have a CDSC. Mutual Funds can also be offered as load-waived or no-load. Institutional shares usually have lower expenses, but do not provide any compensation to the individual or company selling the fund. Institutional shares also typically have high minimum investment requirements. Thus, these shares are typically purchased by individuals through large purchasing arrangements, such as 401(k) plans.

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Sector Funds

A fund which focuses on companies in a particular sector of the economy. Examples include healthcare, technology, or energy.

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Stable Value Funds

Also called Stable Return Funds. Similar to Money Market Fund, but with slightly longer maturities and a more diversified portfolio of fixed holdings, to provide a somewhat higher return over a long period of time. Often, these funds use insurance contracts to provide a guaranteed return.

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Stock (Ownership Share)

A share of stock represents a small piece of ownership in a corporation. Loss is limited to the value of the stock. Stocks may pay dividends.

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Sub Transfer Agent Fees (Sub TA)

Fees by Mutual Funds to companies which service accounts, particularly retirement accounts. Usually paid to a third party administrator (TPA), insurance company, bank, trust company or other financial institution. The theory is that the institution receiving the fees does work that the Mutual Fund would otherwise have to perform. The criticism of these fees is that (a) they have in some cases simply served as an incentive for the institution to offer certain funds and (b) they have not been disclosed to consumers.

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Surrender Charge

A charge imposed by an insurance company to withdraw funds from an insurance policy or annuity contract. A Surrender Charge typically will be lowered gradually over time. The charge protects an insurance company from a policy holder removing funds shortly after a commission has been paid to an agent. Surrender Charges typically range from 5 to 9 percent declining over 5 to 10 years in a Variable Annuity. Surrender Charges typically range from 10 to 15 percent declining over 5 to 15 years in a Fixed Annuity, but some Fixed Annuities have charges as high as 20 to 25 percent.

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Value Funds

A fund which focuses on companies which are believed to be undervalued by the market. Generally a change of leadership, market conditions, or product development could indicate a value investment opportunity

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Variable Annuity

An investment vehicle offered by an insurance company. An insurance company will provide for a limited number (typically 30-60) of sub-accounts that are invested similar to Mutual Funds (the sub-accounts, however, are not Mutual Funds). These sub-accounts are usually operated to mimic the performance of Mutual Funds from a particular fund family or they may own the shares of underlying Mutual Funds. The annuity will have administrative and recordkeeping expenses, as well as M & E fees. Each sub-account will also have an annual expense charge associated with the operation of that fund. It is not uncommon for an annuity company to also receive Sub TA fees from the registered investment companies who operate the sub-accounts. If an annuity is not inside a retirement plan, it will still provide Tax Deferred treatment for investment gains. Most policies have Surrender Charges to withdraw funds (see the Surrender Charges definition).

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World Funds

A fund which focuses on companies which are based inside and outside of the United States. The fund seeks the best investments no matter where they are domiciled.

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Retirement Planning

General

401(k)

A section of the Internal Revenue Code (IRC) that created a tax-deferred retirement plan for corporate employers. It is available to governmental employers who adopted plans prior to 1989. Certain nonprofit organizations can also have these plans. Voluntary contributions must be deducted from an employee's paycheck. Employer contributions and transfers/rollovers are other ways that a 401(k) account can be funded. A 401(k) account can be invested in a wide array of investments. A 401(k) plan is the responsibility of the employer under federal tax and labor law. This employer responsibility is greater than with 403(b) plans. Because of this involvement an employer has fiduciary responsibility for the 401(k) plan.

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403(b)

A section of the Internal Revenue Code (IRC) that created a tax-deferred retirement plan for public school employees and certain other types of nonprofit organizations. Voluntary contributions must be deducted from an employee's paycheck. Employer contributions and transfers/rollovers are other ways that a 403(b) account can be funded. A 403(b) account can only be invested with an annuity policy or a mutual fund held under a custodial account that meets the requirements of 403(b)(7) of the IRC.

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457(b)

A section of the Internal Revenue Code (IRC) that created a tax-deferred retirement plan for governmental employers, public school districts and certain other types of nonprofit organizations. Voluntary contributions must be deducted from an employee's paycheck. Employer contributions and transfers/rollovers are other ways that a 457(b) account can be funded. A 457(b) account can be invested in a wide array of investments. A 457(b) plan is the responsibility of the employer under both federal and state law. This employer responsibility is greater than with 403(b) plans. Because of this involvement an employer has fiduciary responsibility for the 457(b) plan. The 457(b) is the only retirement account which does not carry a 10% early withdrawal tax penalty for distributions prior to age 59 1/2.

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Defined Benefit (DB) Plans

A retirement plan that defines under the plan's rules the benefit that will be paid to the plan participant. The plan sponsor is required to fund the plan based on an actuary's calculations in the amount that will provide the promised benefit. Most people call these plans "Pensions." TRS is a DB plan because it provides a defined benefit (Yrs of Service x Avg Salary x 2.3%). Typically a DB plan will have vesting requirements and then provide an annuity payment for the life of the recipient.

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Defined Contribution (DC) Plans

A retirement plan which by plan rules defines the contribution. The benefit to the plan participant is the account value accumulated from the plan contributions and earnings on these. Employer sponsored retirement plans have been moving towards DC plans for many years. Most 401(k) plans, 403(b) plans, and 457(b) plans are all examples of DC plans.

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Financial Plan

An outline of a person's or family's financial situation with a focus on financial goals and the steps that are necessary to reach them. The goals may include funding for retirement, higher education, purchasing a home, and/or other major purchases.

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Individual Retirement Account (IRA)

A retirement account available to most taxpayers. Unlike employer sponsored retirement accounts, an IRA has almost limitless investment vehicles. No loans are permitted and annual contribution limits are much lower than payroll deducted plans. Other retirement accounts with the same tax qualification status can be "rolled" into an IRA.

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Roth Retirement Accounts 401(k),403(b),IRA

A Roth retirement account has different tax treatment from traditional pretax accounts. Retirement accounts historically have tax-sheltered contributions and are tax deferred until withdrawal. A Roth account contribution is not tax sheltered, but the earnings are never taxed if the account is operated in accordance with federal tax rules.

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Tax Deferred

Refers to the tax treatment of investment returns. If an investment is tax deferred, there is no annual tax liability created on investment gains. Any investment gains are taxed upon distribution only.

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Tax Free

Refers to the tax treatment of investment returns. If an investment is Tax Free, there will not be any tax due on investment gains. Tax Free treatment is generally subject to certain restrictions, such as when withdrawals are taken or for what purpose the funds are distributed.

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Tax Sheltered

Refers to the tax treatment of contributions. If an investment is tax-sheltered, the contributions are not subject to income tax withholding and certain contributions are eligible for a deduction from Adjusted Gross Income (AGI).

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Educators

Creditable Compensation

The amount of salary paid to a member by their employer during the school year that is used in the calculation of the member's benefit (1 or 5 years highest average salary, depending on TRS status).

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Government Pension Offset (GPO)

The Government Pension Offset affects the amount of Spousal or Widower's benefit you will receive from Social Security if you will be receiving a pension benefit from most federal, state or local governments, including TRS. Your Social Security benefit will be reduced by two-thirds of your TRS or other governmental pension. You will receive the difference in addition to your full pension benefit. This offset only effects those who will qualify for Social Security benefits through their spouse.

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Joint and Survivor Annuity

A reduced annuity payment that provides a life annuity to the participant and a survivor annuity for the spouse after the participant's death. The Standard Annuity benefit is reduced by TRS based on the age of the beneficiary and the percentage of benefit chosen for the beneficiary. TRS allows members to choose among a 100%, 75% and 50% survivor options. If the beneficiary was to pre-decease the member, then, under many TRS plans, the reduced benefit is increased back to the Standard Annuity amount.

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Non-creditable Compensation

Compensation received by the TRS member that is not counted towards salary for the purpose of the benefit calculation. A few examples of non-creditable compensation would include expense payments, payments for unused vacation or sick leave, allowances, and payments for work as an independent contractor or consultant (does not count towards 1 or 5 years highest average salary).

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Partial Lump Sum Option (PLSO)

A large one time distribution of retirement benefits resulting in a permanently lower annuity payment. The reduction is based upon age and amount of distribution selected. TRS allows for 12, 24, or 36 months of the Standard Annuity to be withdrawn under the PLSO. Contact your tax advisor for possible tax consequences.

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Retirement Gap

The difference in retirement income from TRS, Social Security, or other pensions and the actual income before retiring. This difference can grow over time as inflation raises the cost of living.

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Rule of 80

Refers to a vesting requirement by TRS to qualify for certain retirement benefits. "80" equals the total of the number of service credits (years of service) under TRS plus current age. This can be any combination (e.g., 25 years of service at 55 years old or 30 years of service at 50 years old). Each benefit plan may have a different vesting requirement (Rule of 70 or Rule of 90), but the concept is the same. The system may also have a minimum age at which you can retire under the Rule.

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Standard Annuity

Maximum payment for state Teachers Retirement System (TRS) retirement benefits to the member. The retiree receives the maximum amount each month and benefits cease at the member's death.

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Trust Platform

An investment platform typically offered by Third Party Administrators, Custodians and other types of financial institutions. An administrative platform, usually Internet-based, is used to offer a choice of many Mutual Funds and families of funds. Often these are no-load funds and load-waived funds. The administrator and custodian charge a separate fee, usually fully disclosed. A Trust platform can offer many of the benefits of a Variable Annuity without the insurance "wrapper" and associated charges. Administrative services and cost can vary significantly by platform.

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Windfall Elimination Provision (WEP)

The Windfall Elimination Provision affects the amount of your retirement or disability benefit if you receive a benefit from a pension plan of most federal, state or local governments, including TRS. A modified formula is used to calculate your benefit amount, and may result in a lower Social Security benefit than you otherwise would receive. This provision only effects those that qualify for Social Security based on their own earnings.

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Industry

Broker-Dealer

A company or other organization that trades securities for its own account or on behalf of its customers. Most representatives of broker-dealers are compensated on a commission basis by the product they sell to the client, either solely or in addition to compensation received on a fee basis from the client.

Fiduciary Duty

The legal obligation that requires anyone who provides services to others to make decisions that are in the sole interest of the person they serve. Plan Sponsors as well as Registered Investment Advisors have Fiduciary Responsibility. This term is most commonly used with regard to investments.

Registered Investment Advisor (RIA)

An advisor / advisory firm who acts in a fiduciary capacity on behalf of clients with a higher standard of disclosure and due care, commitment to disclose, minimize and resolve conflicts of interest than would be found in a traditional securities brokerage environment. Most RIAs are compensated on a fee basis by the client rather than a commission basis by the product. RIAs are registered with and regulated by the SEC (Securities and Exchange Commission) or individual states.