Decoding your 401(k) Plans Jargon
Here’s a great article we picked from Marketwatch:
Complicated, non intuitive terminology may be keeping large numbers of Americans from making good retirement savings decisions. A jargon reboot is long overdue! This article aims to help you better navigate the ridiculous maze of poorly chosen words. Here’s what I mean…
What does the word “contribution” mean to you? Perhaps a “gift” or “donation”? When you make a contribution, do you ever expect to see that money again? Probably not. So when you are asked to contribute to your employer’s 401(k) plan, you may be thinking, “No way. Charity begins at home!” However, in the quirky world of 401(k) jargon, “contribution” really means “payroll-deduction deposit.” By making these deposits, you are helping yourself, not giving money away. Making these deposits might even get you some “match.”
“Match” is another funny 401(k) word. Most people would probably associate “match” with an athletic competition, a dating service or something used by smokers. It doesn’t sound much like “free money,” which is what it really is.
How about the term “deferral”? To the extent that it has any meaning at all to most people, it’s probably something that you put off until later. That sends kind of a mixed message to people who are hearing that they need to be saving for retirement right now. “Deferral” is the same thing as “contribution,” which really means payroll-deduction deposit.
“Allocation” is yet another odd 401(k) word. In common use “allocation” often refers to something in short supply, to describe the amount one is expected to receive, such as a store getting an allocation of the next new iPhone. However, in the context of a 401(k), “allocation” is used to describe one’s investment mix — no idea why.
Speaking of nonintuitive words that describe one’s investment mix, how about “elections”? Yes, believe it or not, “elections” means “investment mix” in 401(k) speak. I, for one, am voting for better 401(k) terminology.
“Asset allocation models” and “model portfolios” can be very useful tools to help people get it right with regard to their 401(k) investments. They are simply managed accounts or investment baskets.
Many 401(k) plans offer a choice between “pretax” and “Roth” deposits. With no disrespect intended to the late Senator William Roth, after whom this feature was named, it isn’t a very intuitive label. How about calling the two options “pretax, deposits and earnings taxed when withdrawn” and “after-tax, deposits and earnings withdrawn tax-free”? Isn’t that more clear?
Why does the 401(k) industry use the term “enroll” instead of “join”? I’d rather join something because it has a more positive ring to it, such as joining a club or organization. “Enrolling” sounds too much like school.
Amazon.com and Wal-Mart have great “distribution” systems. In a 401(k), “distribution” means “withdrawal.” By using the terms “deposit” and “withdrawal” in 401(k), it’s easier to visualize that it’s really just a special type of savings account.
So, please don’t let the twisted jargon of the 401(k) industry keep you from joining and making deposits into a good investment mix , so that you’ll have plenty to withdraw during retirement.