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Back to Basics: Investment Terminology

Welcome to the first edition of Back to Basics! This new feature was created based on some of our plan sponsor clients who indicated that they could benefit from an explanation of certain retirement plan fundamentals.

This inaugural edition of Back to Basics features investment terminology with which plan fiduciaries should be familiar as they evaluate plan investments. Some key terms include:

  • Performance vs. Benchmark — The return of an investment when compared to the stated benchmark for that investment, typically a market index (such as the S&P 500). The benchmark index is often stated in the prospectus or other disclosure materials for the fund, though an adviser might utilize an alternative benchmark if they feel that it is a better fit for the fund.
  • Performance vs. Peers/Category — The return of an investment when compared to funds of a similar type, which typically means funds in the same asset class. Unlike a benchmark comparison, a peer comparison evaluates funds only with each other, and not with an index. For example, the performance of a Large Cap Growth fund in a retirement plan would be compared to the performance of other Large Cap Growth funds.
  • Category Ranking — The percentile ranking of a fund when compared to peer funds in its asset class. The closer the ranking is to 1, the better; with 1 indicating that a fund is in the first percentile and thus performing better than 99 percent of the funds in its asset class.
  • Actively Managed Funds — Funds that are managed to outperform a benchmark index
  • Passively Managed or Index Funds — Funds that are managed to match a benchmark index   
  • Net Expense Ratio — The net expense ratio represents the percentage of a fund's assets that are used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund.  Brokerage costs and sales charges are not included, though retirement plan funds often do not incur such charges.  The lower the net expense ratio, the better.  For example, a fund with a 0.5 percent net expense ratio ($0.50 for every $100 invested) is half as expensive as a fund with a 1 percent net expense ratio ($1 for every $100 invested).
  • Morningstar Rating  This is a proprietary Morningstar measure assigned to most mutual funds and some other types of investments. Values are from 1 (lowest) to 5 (highest) and are based on how well the fund has performed, after adjusting for risk and accounting for sales charges, in comparison to similar funds.

Stay tuned for more exciting investment terminology in the next edition of Back to Basics!

Editor’s Note: Back to Basics is a new Top of Mind feature providing primers on retirement plan fundamentals for those new to the field and those who may need a little more background knowledge on retirement plan concepts (like you Finance and HR executives charged with a variety of tasks in addition to retirement plan administration!).

Do you like Back to Basics?  Can’t stand it? Let us know as always at .

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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