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12b-1 Fees

Annual fees charged by a mutual fund 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.



A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. It is named after a section of the U.S. Internal Revenue Code.

The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.



The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

A 403(b) plan allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits.



A 457(b) is a type of retirement plan offered through employers to help employees build savings for life after retirement. Contributions to a plan can be made directly from your paycheck on a pre-tax basis, lowering your income tax bill.

Unlike a 401(k) or 403(b), if you leave a job or retire before age 59½ and need to withdraw your retirement funds from a 457(b), you won’t pay a 10% tax penalty. This is a big distinction that makes this type of plan even more attractive than its peers.


Active Money Management

An investment management strategy where active managers rely on analytical research, forecasts and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. Refers to the use of a human element – such as a single manager, co-managers, or a team of managers – to actively manage a fund’s portfolio. Funds with active management typically have higher fees than those with a passive investment strategy.


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.


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.


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.


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. The income can be used for living expenses, particularly with retirees, or used to reinvest in additional bonds.


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 can also be call a Contingent Deferred Sales Load, or 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 to7 years. The annual fees associated with a B share typically are higher than an A shares. C shares typically also have a CDSC.


Creditable Compensation (CDSC)

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 (3 or 5 years highest average salary, depending on TRS status).

This includes payments for compensatory time, lump-sum bonus, severance pay, or employer-provided payment for purchase of service credit.


Defined Benefit (DB) Plans

A retirement plan in which by plan rules defines 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”. For example, Texas 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.


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.


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.


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 annuity funds in the same investment as a Fixed Annuity. The remaining balance is used to purchase call options on a particular equity index (e.g., the S & P 500). 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 interest rate (partially based on the index performance) can be paid 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 indices, such as the S&P 500. EIAs are very complicated investments which provide for no investment losses and the potential for partial index investment gains. Most policies have Surrender Charges to withdraw funds. The sale of EIAs as promising stock market returns with no risk has been criticized by regulatory agencies as misleading. Talk to a financial advisor about how EIAs can be a part of your plan.


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, and fund manager compensation. These expenses can range from under 0.15% annually to over 3.00% annually depending on the type of share class, investment objective, and fund family.


Fiduciary Responsibility

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.


Fixed Annuity

An investment vehicle offered by an insurance company in which the company guarantees the return of principal in the policy plus a guaranteed interest rate and 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.


Front-End Sales Load

A front-end load is a commission or sales charge applied at the time of the initial purchase of an investment. The term most often applies to mutual fund investments, but may also apply to insurance policies or annuities. The front-end load is deducted from the initial deposit, or purchase funds and, as a result, lowers the amount of money actually going into the investment product.


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 affects those who will qualify for Social Security benefits through their spouse.


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.


Guaranteed Period Annuity

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.


Index Funds

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


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.


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 may be reduced by different pension programs based on the age of the beneficiary and the percentage of benefit chosen for the beneficiary.


Large Capitalization (Large Cap)

Large-cap refers to a company with a market capitalization value of more than $10 billion. Large-cap stocks represent approximately 98.5% of the total U.S. equities market as measured by the Wilshire 5000 Total Market Index, which only includes companies with a minimum of $25 million float-adjusted market cap.


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, 35% bonds, and 15% cash. In 2030 the allocation is 10% stocks, 50% bonds, and 40% cash.


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.


Middle Capitalization (Mid Cap)

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


Money Market Funds

A fund which has only short-term investments which can be considered as cash or cash equivalents. 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.


Mortality & Expense Charge (M & E)

The M&E fee is an acronym that refers to the mortality and expense fee. This fee is charged by the insurance company and it is intended to cover the cost of death benefits (the “mortality” portion) and the expenses of other insured income guarantees that might be included with the annuity contract. The mortality expense involves the risk of the contract holder dying while the account balance is less than the total of premiums paid less any withdrawals. Again, the expense portion is intended to cover the costs of providing and administering any other insured features. Total M&E charges typically range from .40 to 1.75 percent per year, with an average of around 1.25 percent. Most insurers deduct this expense on an annualized basis. With variable annuities, the M&E fee is only applied to funds held in the separate accounts and not to any of the funds held in the general account.


Mutual Fund

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.


Non-creditable Compensation

Compensation received by the 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.


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.

Contact your tax advisor for possible tax consequences.


Passive Money Management

An investing strategy that mirrors market indexes and does not attempt to beat the market. Followers of Passive Money Management believe 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.


Retirement Gap

Your retirement gap is the difference between the income you’ll need during retirement and the income you’ll receive from your pension. Identifying your gap and having a plan in place to close that gap are part of building a secure retirement.

You can close this gap by contributing to an employer sponsored retirement plan (like a 401(k)/457(b)/403(b), etc.) or by contributing to a Individual Retirement Account.


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

A Roth account is a special type of tax-advantaged individual retirement account to which you can contribute after-tax dollars. The primary benefit of a Roth account is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½. In other words, you pay taxes on money going into your Roth account, and then all future withdrawals are tax-free.


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). Other benefits may have different vesting requirements (Rule of 70 or Rule of 90), but the concept is the same.


Sector Funds

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


Small Capitalization (Small Cap)

A small cap company typically has under $2 billion market cap and are hence considered small companies.


Stable Value Funds

A stable value fund is a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. The owner of a stable value fund will continue to receive the agreed-upon interest payments regardless of the state of the economy.


Standard Annuity

The standard annuity option is the highest monthly payment available to you for your lifetime. The standard annuity option stops when you pass away. If there is money left in your account after your death, your beneficiary receives a one-time lump sum payment.


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.


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 mutual funds and (b) they have not been disclosed to consumers.


Surrender Charge

A surrender charge is like a penalty fee for taking money out of a special account or canceling a policy before a certain time. It’s like making a deal with a bank that you won’t touch your money for a certain period of time, and if you break the deal, the bank will take a small percentage of your money as a fee. Surrender charges are common in some types of insurance policies and investment products, and they gradually decrease over time.


Tax Deferred

Tax-deferred status refers to investment earnings—such as interest, dividends, or capital gains—that accumulate tax-free until the investor takes constructive receipt of the profits.

An investor benefits from the tax-free growth of earnings with tax-deferred investments, and if held until retirement, the tax savings can be substantial. Examples of tax-deferred vehicles include 403(b), 457(b), and 401(k) plans.


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 for.


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).


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.


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.


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. 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 mutual fund companies who operate the sub-accounts. If an annuity is not inside of 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).


Windfall Elimination Provision (WEP)

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. 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 mutual fund companies who operate the sub-accounts. If an annuity is not inside of 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).


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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