401(k) Glossary for Beginners

401(k) Glossary for Beginners

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Managing your 401(k) is one of the most overwhelming personal finance items most people face, not because it’s complicated, but because there’s so many confusing words. Don’t worry, we’ve got your back.

401(k) plan sponsor

A designated party (usually the company your work for) who sponsors a 401(k) plan for the benefit of the plan participants—typically its employees.

Administrator

The company that your employer hires to oversee the 401(k). Examples include but are not limited to: Vanguard, Fidelity, and Charles Schwab. This tends to be where a lot of people get confused – you may work for Bear & Bull Industries, but your 401(k) plan is sponsored by Fidelity. Another name = an opportunity for confusion. Direct all questions regarding your 401(k) to your plan administrator (Vanguard, Fidelity, Charles Schwab, etc).

Contribution Limits

The federally-mandated maximum amount that you are allowed to contribute to either your 401(l) or IRA. Currently these are set to $19,500 for the 2020 tax year.

Defined benefit plan

A type of plan that pays out a specific, pre-set amount of money when you retire.

Defined contribution plan

Does not pay out a pre-defined amount of money like a defined benefit plan. Instead, provides regular, set contributions to a 401(k) plan.

Match

Sometimes, employers try to help you out and try to “match” a certain percentage of what you contribute to your 401(k). The details of the percentage amount, vesting period, etc. vary firm by firm. An example of this in action is as follows. If your company “matches” 3%, that means that if you put in 3% of your $100,000 salary, or $3,000, your company puts another $3,000 in, for a total of $6,000 contributed to your (401)k.

Vesting

The period of time you must work at a firm before you have access to your 401(k). This varies company by company.

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