Understanding Key 401(k) Terms
Clear, simple definitions of the terms employers and committees encounter most often. Navigating the world of retirement plans requires a firm grasp of the terminology used by providers, regulators, and fiduciaries. This glossary provides clear, straightforward explanations of the concepts essential for effective plan oversight and committee decision-making.
Glossary Terms
Fiduciary
A person or entity legally responsible for acting in the best interest of plan participants.
3(21) Fiduciary Advisor
An advisor who shares investment responsibility with the plan sponsor but does not have full discretion.
3(38) Investment Manager
A fiduciary with full discretion to select, monitor, and replace investments on behalf of the plan sponsor.
Investment Policy Statement (IPS)
A document outlining how the plan’s investments are selected, monitored, and reviewed.
Qualified Default Investment Alternative (QDIA)
The default investment used when participants do not make their own elections, often a target‑date fund.
Safe Harbor Plan
A plan design that automatically satisfies certain IRS nondiscrimination tests by meeting specific employer contribution rules.
Auto‑Enrollment
A feature that automatically enrolls eligible employees into the plan unless they opt out.
Auto‑Escalation
A feature that automatically increases participant contribution rates over time.
Vesting
The schedule that determines when employees fully own employer contributions.
Matching Contribution
The amount an employer contributes to the plan based on employee deferrals.
Profit Sharing
An optional employer contribution that can be allocated using various formulas to reward or incentivize employees.
Recordkeeper
The provider responsible for maintaining participant accounts, processing contributions, and providing statements and online access.
Plan Sponsor
The employer who establishes and maintains the retirement plan.
Nondiscrimination Testing
IRS tests that ensure the plan does not disproportionately benefit highly compensated employees.
Target‑Date Fund (TDF)
A diversified investment option that automatically adjusts its risk level as the participant approaches retirement.
Highly Compensated Employee (HCE)
An employee who meets IRS compensation or ownership thresholds and is subject to special testing rules.
Summary Plan Description (SPD)
A document that outlines the key features, rules, and participant rights under the retirement plan.
Form 5500
An annual report filed with the Department of Labor that provides information about a retirement plan’s financial condition and operations.
Plan Administrator
The individual or entity responsible for managing the day‑to‑day operations and compliance of the retirement plan.
Employer Contribution Limits
The maximum amount an employer can contribute to an employee’s retirement account, subject to IRS limits.