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​Glossary of Retirement Terms
 

 Glossary

 
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Definition
401(k) Plan
A retirement savings plan designed to offer individuals added tax benefits on top of their regular retirement plans. This plan is commonly offered to both public and private sector employees. Employees may make salary contributions on a post-tax and/or pretax basis. Earnings accrue on a tax-deferred basis.
403(b) Plan
A retirement savings plan for certain employees of public schools, tax-exempt organizations and certain ministers. The features of a 403(b) plan are very similar to those of a 401(k) plan. Employees may make salary deferral contributions that are usually limited by regulatory caps.
 
Individual accounts in a 403(b) plan can be any of the following types:
  • An annuity contract, which is provided through an insurance company
  • A custodial account, which is invested in mutual funds
  • A retirement income account set up for church employees
457 Plan (Deferred Compensation Plan)
A retirement savings plan that allows the earner to use their income later in life when they have a lower tax rate. This plan is established by state and local governments and tax-exempt governments and tax-exempt employers. With this plan, any full-time, temporary, or part-time employee is allowed to make salary deferral contributions. Employees are allowed to defer up to 100 percent of compensation not exceeding the applicable dollar limit for the year.
Annual Required Contribution Rate
Annual required contribution (ARC) is the amount the employer is required to contribute to a defined benefit pension fund annually, based on an actuarial formula, to fund current and future retirement benefits and liabilities. It is the amount needed to payout the benefits of future retirees.
 
Even if we achieve investment target returns as the economy recovers, the funding status will continue to decline as losses from the 2008 downturn are distributed over the next several years and as contributions continue to fall short of the actuarial requirement. If funding contributions are met, funding status will fall to 90 percent.
 
Though TSERS has fallen below a fully funded status, it continues to rank within the top five systems nationally.
Annuity
A financial product, usually offered by an insurance company, that offers a series of payments over an individual’s lifetime. Immediate annuities begin payments to the annuity owner shortly after purchase. A deferred annuity has a savings phase, in which the money you put into the annuity earns interest, and an income phase, in which your account becomes an annuitized series of lifetime payments.
Automatic Enrollment
Employees are automatically signed up to participate in a supplemental plan, such as a 401(k) plan, unless they opt out. Currently in the North Carolina Retirement Systems, members have to opt in to participate in the supplemental retirement plans.
Bond
A financial product offered by a corporation or government entity. Bonds are debt obligations for the issuer. Bonds have either a variable or fixed rate of return over their lifetime. They are generally safer investments than stocks, though on average they have lower rates of return. Bonds offered by the U.S. Treasury have minimal investment risk, although they may be exposed to inflation risk and interest risk.
Cash Balance Plan
A plan that is defined by law as a defined benefit plan, but has some of the features of a defined contribution plan, particularly the use of individual accounts, although the accounts are virtual and used merely for accounting purposes.
COLA (Cost of Living Adjustment)
Used by defined benefit plan sponsors to counteract the effects of inflation, COLAs increase benefit payments by a certain percentage, although the increase does not necessarily meet or exceed the CPI.
CPI (Consumer Price Index)
A measure of inflation that is calculated from the change in price of a basket of goods from one period to the next.
Defined Benefit Pension Plan
A defined benefit plan promises participants a specified monthly benefit at retirement. Both participants and their employers contribute a percentage of their salary each month. Investments are managed, and the risk assumed, by the employer. The retirement benefit is determined through a plan formula that considers factors such as salary, age, and length of service. Most public state and local government retirement plans across the country are defined benefits plans.
Defined Benefit Plan
A retirement plan in which a member’s benefits are based on a preset calculation – it is typically the product of service length, annual salary (in the case of NC retirement systems, the average of the four years of highest salary) and a multiplier. Traditional defined benefit plans, also called pensions, pay a series of benefits over the retiree’s lifetime. 
Defined Contribution Pension Plan
In a defined contribution plan, individual accounts are set up for participants. Employees contribute a percentage of their salary each month as determined by the individual employee. Contributions are invested on the participant’s behalf and based on investment decisions or styles selected by the participant. Benefits are based on the amounts contributed to these accounts by the employee, and in some cases employer contributions, plus any investment earnings on the money in the account. The participant receives the balance in his or her account, which is based on contributions plus or minus investment gains or losses. Examples of defined contribution plans include 401(k) plans, 403(b) plans, and 457 plans.
Defined Contribution Plan
Under these plans, the member holds an individual account and has some degree of flexibility over how the assets are invested. Upon retirement, the member typically receives his or her account in a lump sum, though the funds can be re-invested or used to purchase an annuity.  Defined contribution plans, such as 401(k) and 457(b) plans, are named and defined by the IRS code which governs them.
Equities
Shares of stock in a company.
Home Equity
The market value of your home minus any outstanding debt for that home. Home equity increases as homeowners pay off their mortgage and the home appreciates in value. 
Inflation
The rise in aggregate consumer prices that leads to a decline in the purchasing power of the $ from one period to the next.
Inflation Risk
The risk that inflation will increase during an individual’s retirement years, reducing the purchasing power of retirement income.
Investment Risk
The risk that an individual investment loses value (non-systematic risk) or that the entire market experiences a downturn (systematic risk). Diversifying a portfolio of investments is a way to address non-systematic risk.
IRA (Individual Retirement Account)
A retirement savings vehicle that is governed by the IRS code and offers certain tax advantages. Detailed information can be found in this IRS publication - http://www.irs.gov/pub/irs-pdf/p590.pdf
Longevity Insurance

Usually purchased around retirement age; a type of deferred annuity in which the income phase is deferred to around age 85.

Longevity Risk
The risk that a retiree will outlive his or her assets.
Medicare

A Federal health insurance program that those ages 65 or older (and other excepted individuals) are eligible for. It consists of the following parts:

  • Part A: insurance for hospital services
  • Part B: insurance for doctor’s visits and outpatient procedures
  • Part C: Medicare Advantage Plans (includes part A & B) that are run by private carriers and typically include prescription drug coverage and other supplemental insurance
  • Part D: Prescription drug coverage
Medigap
Supplemental insurance purchased from a private insurance provider that covers medical costs not covered by Medicare.
Rate of Return
The percentage of money earned on an investment over a period of time.  For example, if an investor buys $100 worth of a stock at the beginning of a period and earns $10 (the return) on that stock by the end of the period, then the rate of return is 10% (10/100). The rate of return can be positive (gain) or negative (loss).  The real rate of return is the rate of return minus the inflation rate. 
Replacement Rate
The ratio of post-retirement income to pre-retirement income.  An adequate replacement rate will be one in which the retiree has enough post-retirement income to meet his or her needs.
Reverse Mortgage
Home equity that is converted into a lump sum payment or series of payments to the homeowner. Reverse mortgages are typically available only to those over age 62. A reverse mortgage is a loan and must be paid back once the homeowner is deceased or no longer uses the residence. 
Stock
A financial product which guarantees a share of ownership in a company. Stocks have rates of return that are dependent upon the company’s performance. Shares of stock in a company are also called equities.
TIPS (Treasury Inflation-Protected Securities)
Financial products issued by the United States Treasury that adjust the principal of the security with changes in the CPI. 

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