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  • Ryan Oates

Key terms to know about your retirement plan…

One of the biggest reasons people don’t participate in their company’s retirement plan, is they don’t understand a lot of the terms used in plan documents. Here are some simple ways to think about these terms.


Default Investment Option – Sometimes referred to as a QDIA. This means that if you don’t choose an investment option, this is what the plan will pick for you. In many cases this option is either a Target Date Fund or a Risk Allocation Fund.

Target Date Fund – Think of these as funds that are on auto-pilot. As you get closer to retirement, they will automatically adjust the risk of your account lower so you aren’t taking as much risk at age 60 as you did at age 40 for example.

The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.

Risk Allocation Fund – Think of these funds like you are picking a certain amount of risk and that fund will stay at that risk level until you change it. So if you pick a Balanced Fund, this fund may have 50% in stocks and 50% in bonds and it will stay around those percentages because the fund will Re-balance on its own.

Re-balancing – This is simply the act of your account being adjusted back to its intended risk level. So in the Balanced Fund above you started at 50% in stock and 50% in bonds. If the stock market did well and your account is now 60% in stock, the fund will readjust back to the 50/50 blend.


Company Match – This is the money your company will give you for participating in the plan. Not all plans have a matching feature. So if your company match says something like, “100% up to 3%”, this means that the company will match the first 3% you contribute.  If you only put in 2%, you will only get 2% from them.

Elective Deferral – This is the amount you contribute to your retirement plan from your pay check.  This number is based on your Gross Pay, which is the amount you make before all of your deductions.  If you make $1,000 in Gross Pay and you contribute 3%, that would be $30 and it would come out of your pay like any other Pre-Tax Deduction (unless you make Roth Deferrals) just like health insurance or taxes.

Roth Deferral – This is an Elective Deferral like above but it comes out of After Tax Pay.  So if you make $1,000 in Gross Pay and after all your deductions, you bring home $700, then the $30 contribution would come off the $700 and you would now bring home $670.  If you made Pre-Tax Contributions, the $30 would come from your Gross Pay and would reduce your taxable income.  The decision on which contribution you should make should be discussed with your tax professional.


There are more terms which I will discuss in the near future, but as always, educate yourself on your retirement plan and if you need help, turn to someone who has your best interests in mind and will provide objective advice!

Until next time,

Ryan Oates, MBA, CPFA

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This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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