Definitions

Fiduciary: Latin meaning "trust." Refers to a business or person who may act for another with total trust, good faith, and honesty who has the complete confidence and trust of that person. A fiduciary may include a trustee of a trust, a business adviser, attorney, guardian, estate administrator, real estate agent, banker, stockbroker, or title company. The fiduciary has more knowledge and expertise about the matters being handled and is held to a higher standard of conduct and trust than a stranger or a casual businessperson. Conflicts of interest must be avoided where the fiduciary's interests are not in the best interest of the person who trusts him/her/it. For example: a stockbroker must consider the best investment for the client and not buy or sell on the basis of what brings him/her the highest commission. In a 401(k) plan this is usually a corporate executive, business owner or investment committee, who is responsible for selecting the 401(k) service providers and making sure the plan participants’ interests are held above their own. This responsibility can be mitigated by hiring competent independent fiduciaries such as investment advisors and plan consultants to make important decisions on behalf of the plan.

Plan Sponsor: an employer who sets up a retirement plan for its employees.

Plan Participant: the employees who take part in their company’s 401(k) plan.

Third Party Administrator (TPA): The TPA will design a 401(k) plan that will meet the company's and its employees' needs and ensure the plan is operating within the law.

Recordkeeper: the firm or individual that:

1) Tracks your contribution rates, investment selections and balance
2) Tracks the amount of employer matching contributions due to you
3) Provides account statements
4) Maintains information about any outstanding 401k loans you might have, such as balance due, monthly payment and interest due.

Recordkeeping services are provided by accountants, payroll service providers, brokerage firms and mutual fund companies. A 401k plan needs a recordkeeper because 401k savings are commonly aggregated into an omnibus account. In this account, all of your investments are lumped together with those of the other participants in your plan.

Defined Contribution Plan: aka 401(k) plan. Usually participant directed.

Defined Benefit Plan: Old school corporate pension plans. Never participant directed. Going out of vogue.

Bundled Plan: a 401k plan where all the services (TPA, recordkeeping, investments) are bundled into one price with seemingly only one providers. There are a lot of problems with this models as plan sponsors cannot control who is being paid for what services, thereby creating potential breaches of fiduciary responsibility for the plan sponsor.

Unbundled Plan: a 401k plan that can hire or fire the service providers independently from one another. Fees are usually fully disclosed and allows for proper comparison of pricing. Much cleaner form of managing a 401k plan.

Custodian: The institution (usually a bank or brokerage firm) that holds the assets of the 401k plan. The custodian usually acts as trustee for the plan. The plan trustee actually holds title to the assets, but for your benefit.

Expense Ratio: Every mutual fund will have an annual % fee applied to client balances, this is the expense ratio. It is how mutual fund companies make the bulk of their revenues. These ratios can be as small as 0.07% and as large a 2%+.

Trading Costs: The costs incurred by portfolio managers of mutual funds by trading the stocks or bonds that make up the mutual fund. These costs are hidden but borne by the investors in the mutual funds. Trading costs can sometimes be 100% of the expense ratio.