Glossary: 401(k) Plans

401(k) plan: A defined contribution plan into which employees can elect to have their employer put a pre-tax portion of their salary in the form of cash or company stock.

annuity: A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

asset allocation: The act of dividing your investments into different investment categories, including domestic and foreign stocks, bonds, cash accounts and other assets.

defined benefit plan: A traditional pension plan whereby an employer maintains an account for workers and promises a specified benefit upon retirement.

defined contribution plan: 401(k)s and other defined contribution plans do not pay a specified benefit upon retirement. Instead, the money available to help you fund your retirement is based on the amount of contributions you invested in the plan, length of time and the performance of your investments over time.

employer contributions: Contributions made by an employer to an employer-sponsored retirement plan. Depending on plan type, employer contributions may be mandatory or discretionary.

employer matching contribution: The amount of money, if any, an employer puts toward a worker's 401(k) account. An employer may match 50% of the first 6% of pay contributed by the worker.

index fund: A mutual fund that seeks to track general stock-market performance by matching its portfolio to a broad-based index, such as the Standard & Poor's 500-stock index.

participant-directed account: An account allowing participants to make their own investments.

vesting: The period of time that an employee must work at a firm before gaining access to employer-contributed pension income. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.