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Frequently Asked Questions: Glossary

Pension Glossary


Accrued Benefit:
The amount of benefit earned to date based on your service or contributions to a retirement plan. The portion of accrued benefit contributed by your employer is subject to a vesting schedule.

Accrued Vested Benefit:
The amount of benefit earned to date based on your service or contributions to a retirement plan. The portion of accrued benefit contributed by your employer is subject to a vesting schedule.

Actuarial Equivalent:
A retirement plan may offer you more than one forms of payment such as single life annuity, joint and survivor annuity or lump sum distribution. You may choose one of the options. It makes no difference to the plan which form you choose because it was calculated to be actuarial equivalent, i.e. they have the same value.

Actuary:
A professional whose work includes making actuarial equivalent calculations and calculations to determine the funding requirements of a defined benefit pension plan.

Annuitize:
To arrange for a gradual payout, for instance monthly, of an investment, such as a pension or annuity contract, over a stated number of years or your life expectancy (or joint life expectancy with you beneficiary), instead of taking it in one single sum.

Annuity:
An investment that promises regular payments over a certain period of time.

Calculation Age:
The age you want to use to calculate the present value (lump sum value) of an annuity.

Career-Average Formula:
The method of determining the amount of a defined benefit pension by multiplying a percentage of the employee’s average salary over the years of employment by years of service to the company.

Cash Profit Sharing Plan:
A plan that pays employees a portion of its profits in cash or stock.

Cliff Vesting:
Awarding 100% of accrued benefits to an employee after a certain number of years of service (e.g. 5) in a company.

COLA:
See Cost-of-Living Adjustment.

Compounding:
The growth of principal left undisturbed as it gathers interest, and interest on the interest.

Cost-of-living Adjustment (COLA):
An annual adjustment on wages or other regular payments (e.g. pension benefits) that is in line with the Consumer Price Index or some other rate of inflation.

Credited Service:
The number of years of employment that count toward earning pension benefits.

Deferred Income:
Income that is due an individual but has not been actually received by that individual and is usually not taxed until it has been paid.

Deferred Profit Sharing Plan:
A plan that pays employees in cash or stock according to company profits, but withholds actual payment until the employee retires.

Defined Benefit Plan (DB):
An employer pension plan that pays monthly benefits calculated by a benefit formula as defined in the plan document. Most plans allow this benefit to be paid in other optional forms of payment such as lump sum or joint and survivor annuity. Benefits under a defined benefit plan are guaranteed by the Pension Benefit Guarantee Corporation, a U.S. government agency.

Defined Contribution Plan (DC):
An employer pension plan that defines how much contributions to be made by employee and employer to each employee’s individual account. The account grows according to the amount of contributions and investment earnings. Payments are not government guaranteed.

Early Retirement:
Retire earlier than normal with reduced benefits. Benefits are reduced for longer period of payments.

Employee Stock Ownership Plan (ESOP):
Profit sharing plans that offer primarily a company’s own stock, but not for immediate trading or selling.

Employee Retirement Income Security Act (ERISA):
A federal law that contains guidelines for the operation of pension plans.

Enrolled Actuary (EA):
An actuary who specializes in defined benefit pension plans and enrolled under the Employee Retirement Income Security Act of 1974 (ERISA).

FICA:
The Federal Insurance Contributions Act - a tax on income that ensures eligibility for Social Security payments and Medicare.

Fiduciary:
An individual or institution responsible for holding and managing someone else’s property, which can be benefits, assets, or money.

Flat Benefits Formula:
A method of determining a defined benefit pension that awards all employees a pension based on length of service, regardless of earnings.

401(k) Plan:
An employer-sponsored retirement plan that allows contributions from employees and employer to be invested and grow tax-free until withdrawal.

403(b) Plan:
Similar to 401(k) plans, but set up for public employees and employees of nonprofit organizations.

Full Retirement:
The Social Security Administration considers 65 to be full retirement age. If you retire before this age, your benefits will be reduced. This benchmark is set to rise to 67 for those born after 1960.

GATT:
General Agreement on Trade and Tariffs (1994). In particular, GATT prescribes the mortality table (1983 GAM 50/50) and interest rate to be used for calculating the lump-sum value of a pension benefit.

Graded Vesting:
Method of vesting which makes available no less than 20 percent of an employee’s accrued benefits at 3 years and 100 percent at 7 years, or other similarly phased vesting.

Income Replacement Ratio:
See Replacement Ratio

Integration:
The calculation of a pension benefit that reflects the amount due an employee from Social Security; also known as permitted disparity.

Joint and Survivor Pension:
A plan that offers monthly payments lower than a single life pension, but the payments extend beyond the death of the employee through the spouse’s lifetime.

Normal Retirement Age:
The age where pension benefits are payable in full. This is defined in the plan document. Most private pension plans define age 65 as the normal retirement age.

Pension Benefit Guaranty Corporation (PBGC):
The federal agency that provides guarantee to benefits under the defined benefit pension plans.

Qualified Joint and Survivor Annuity:
An instrument that requires employers to pay an employee’s pension; after the employee dies, his or her spouse receives benefits.

Qualified Plan:
A pension or retirement plan that meets certain IRS requirements and so can shelter some contributions and earnings from taxes until retirement.

Replacement Ratio:
The monthly gross incrome needed when you retire, divided by your gross monthly income just prior to retirement.

Start Now Factors (also known as immediate annuity factors):
An annuity that begins immediately at the calculation age.

Start Age 60:
An annuity that begins at age 60.  For example, if you want to calculate a lump sum value of an accrued benefit (annuity) at age 40, with annuity payable beginning at age 60, you would select the lump sum factor at age 40 under the Start Age 60 column.  For calculation age 60 and later, the lump sum factors are the same as the Start Now factors.

Start Age 62:
(Replace 60 by 62)

Start Age 65:
(Replace 60 by 65)

Straight Life Annuity (also known as lifetime annuity):
An immediate annuity that pays until death.

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