Actively Managed Alternatives
An "alternative"
investment contract in which the underlying investment is a portfolio (or
portfolios) of assets that can be actively traded over time. (As compared to a
"passive" alternative, in which the underlying asset has been purchased and is
held until maturity.)
Alternative GIC
Also called synthetic GICs, this is
a class of investments with characteristics similar to those associated with
traditional investment contracts (GICs) issued by life insurance companies.
Alternative GICs allow the investor to separate the components of traditional
investment contracts and recombine them in different ways to tailor the risk,
reward, and liquidity characteristics of individual contracts and the portfolio.
Many alternative GICs allow for direct legal ownership of the underlying assets
or collateralization of pledged assets. Alternatives may be issued by insurance
companies, banks, brokerage houses and, indirectly, by investment managers. They
can be actively or passively managed.
Basis Point
One one-hundredth of a percent.
Although there are three ways to indicate a basis point: .01%, 1 b.p. and .0001,
to avoid confusion, 1 b.p. (or .0001 for contracts) is preferred. (30 b.p. =
.0030)
Benefit Responsive
The ability to withdraw funds
at contract value (i.e., full principal and accrued interest) during the life of
the investment in order to make benefit payments (normally for retirement,
death, disability, or termination) or employee-directed transfers to
non-competing investment options.
Bank Investment Contract (BIC)
A contract value
investment vehicle, similar to GICs, issued by banks.
Book Value Accounting
The accounting treatment
that allows for guaranteed principal and a certain rate of interest over a
specific period of time. Interest rate risk is minimized for book value assets
because they do not have to be "marked-to-market."
Bullet GIC
A type of investment contract in
which a single deposit is made in a stable value investment. Additional deposits
are not permitted during the term of the contract.
Cash Buffer
An amount of liquid, short-term
investments held by the investment manager/advisor to meet liquidity needs.
Cash Flow
The amount of money flowing into and
out of a plan during a period of time.
Compound Contract
A contract in which all interest
is compounded until the contract's maturity date. (As compared with simple
contracts in which interest is typically paid annually.)
Contract Value Accounting
The accounting treatment
for stable value investments that provides for assets to be maintained at
contract value rather than market value. Interest rate risk is minimized for
contract value assets since they do not have to be "marked to market."
Defined Benefit Plan
A plan that promises to pay
a specified amount to each person who retires after a specified number of years
of service or under specified conditions. The investment risk under such a plan
rests with the plan sponsor, since the sponsor must make up any underfunding
(defined by ERISA and the Internal Revenue Code as any plan that is not an
individual account plan).
Defined Contribution Plan
A plan that provides an
individual account for each participant and in which benefits are based solely
upon the amount contributed to the account plus or minus any income, expenses,
gains, and losses allocated to the account. Under such a plan, the investment
risk rests with each participating employee, since the ultimate benefit depends
on both contributions and earnings.
Duration
A fixed-income measurement of the
interest rate sensitivity of an investment.
401(k) Plan
A retirement plan that permits an
employee to set aside a portion of salary in a tax-deferred investment account
selected by the employer. Contributions made to the account and income earned by
the contributions are sheltered from taxation until the funds are withdrawn.
(Also called salary redirection plan.)
403(b) Plan
A retirement plan that permits
employees of a tax-exempt charitable, educational, or religious institution to
contribute a certain portion of wages or salary into a tax-sheltered fund.
Contributions serve to reduce taxable income in the year they are contributed.
Taxes on income earned in the plan are deferred. Both past contributions and
income are fully taxable when withdrawals are made. (Also called "tax-sheltered
annuity" and "tax-deferred annuity.")
457 Plan
A salary redirection plan that permits
employees of public entities to contribute a certain portion of their salaries
into a tax-deferred investment account. Contributions made to the account and
income earned by the contributions are sheltered from taxation until the funds
are withdrawn. A 457 plan is similar to a 401(k) plan, but with some differing
administrative requirements.
Fair Value
For benefit-responsive stable value
investments, "fair value" is generally determined to be contract (or book)
value.
Guaranteed Investment Contract (GIC)
A book value
investment vehicle issued by an insurance company, backed by the issuer's
general account.
Indexed GIC
A GIC with a floating (not fixed)
interest rate. The yield of an Indexed GIC is tied to a market index and the
contract's rate is reset accordingly over time.
Installment Payout
Principal is returned to the
contract holder based on a schedule determined at the time the contract is
purchased (e.g., three-year GIC with one-third principal returned annually).
Intermediary
An organization that provides
investment and/or administrative services to a plan. The organization may or may
not have investment discretion. Types of intermediaries include bank trust
departments, investment managers, consulting firms, and brokers.
Investment Contract
A book value investment
vehicle, typically provided by insurance companies (GICs) or banks (BICs), which
is backed by the issuer's general account.
LIFO (Last in, First out) Payments
A type of
benefit responsiveness in which investment contracts are accessed for benefit
payments based on the last contract to which funds were deposited. When all
funds are exhausted from the most recent contract receiving funds, the next most
recent contract is accessed.
LIFO Pro Rata Payments
A type of benefit
responsiveness in which the last contract funded is first accessed for benefit
payment and, once all funds are exhausted from the contract, additional
withdrawals are taken from the remaining contracts on a pro rata basis.
Maturity Laddering
Investment strategy whereby a
portfolio is constructed of stable value investments with varied maturities to
provide for constant availability of funds. This strategy minimizes reinvestment
risk and provides cash availability for benefit payments (to avoid tapping the
benefit-responsive features of contracts).
Non-qualified Plan
A plan that does not meet
the requirements of Section 401(a) of the 1954 Internal Revenue Code and that,
as a result, suffers distinct disadvantages from a tax viewpoint.
Participant
An employee of the plan sponsor who
is participating in a retirement plan.
Passive Alternative
An "alternative" investment
contract in which the underlying assets have been purchased and will be held
until final maturity (as compared to an "actively managed" alternative, in which
the underlying assets may be traded).
Perfected Security Interest
The legal right to
the proceeds of the sale of underlying assets in the case of default by the
issuer, wrap provider, or guarantor, as appropriate.
Plan
An arrangement under which employer and
employee contributions, if any, are deposited with a trustee who is responsible
for the administration and investment of these monies and the income earned on
accumulated assets of the fund. The trustee is also typically responsible for
the direct payment of benefits to eligible participants under the plan.
Plan Sponsor
The party that establishes and
maintains an employee benefit plan.
Pooled/Commingled Stable Value Fund
Portfolio of
investment contracts managed and marketed by an intermediary to plan sponsors
and trust departments. Investments in the plan are commingled to enable greater
purchasing power and diversification and to provide liquidity.
Pro Rata Payments
A type of benefit
responsiveness whereby benefit withdrawals are paid from all contracts in a fund
in proportion to the size of each contract relative to the total fund size.
Qualified Plan
A plan that the Internal Revenue
Service approves as meeting the requirements of Section 401(a) of the 1954
Internal Revenue Code.
Separate Account Contracts
An alternative or
traditional investment contract in which the contract is backed not by the
general account of the issuer but rather by a dedicated asset or portfolio of
assets.
Simple Interest
Interest paid only on the
initial investment. Simple interest is calculated by multiplying the principal
times the annual rate of interest times the number of years involved.
Stable Value Assets
A class of investments
characterized by security of principal and a consistent, predictable return.
Synthetic GIC
See Alternative GIC.
Window GIC
An investment contract that allows
for the ongoing deposit of funds by the contract holder. A dollar window allows
the contract holder to deposit up to a predefined dollar amount in a contract
without regard to the period of time needed to reach the dollar limit. With a
period (time) window, the issuer agrees to accept a percentage of cash flow
generated by the plan for a specified time.
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