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What is a 401(k)?
Named for the IRS code that defines it, a 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute money from their salaries before it is taxed. Any earnings on your investments are also tax deferred -- that is, earnings are not taxed until they are withdrawn. You may also hear this plan referred to as a defined contribution plan, a tax-deferred savings plan, or a qualified plan.
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What is a Bond?
The most common debt security. A bond is basically an IOU certifying that the bondholder has loaned money to a corporation or government and describing the terms of the loan repayment period and interest rate. A bond usually matures in 10 to 30 years and pays interest only at regular intervals. The principal amount of the bond is repaid at maturity. Municipal bonds are bonds issued by a state or local (city) government or agency.
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What is a Stock?
The capital invested in a company or corporation through the buying of shares, each of which entitles the buyer to a part of the ownership. When individuals or institutions buy the stocks, they become owners of a piece of the corporation. This ownership interest is called equity.
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What is a Mutual Fund?
A mutual fund is a professionally managed pool of stocks, bonds and other securities, which are owned mutually by the funds investors in proportion to their investment in the fund. The amount of risk varies among the different investments in the fund. In this way, your investment is diversified. Mutual funds are registered with the Securities and Exchange Commission.
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What is a Separate Account?
Separate accounts are pooled investment portfolios established by an insurance company that are not registered with the Securities and Exchange Commission. They are available only to investment funds from retirement plans that are qualified under Section 401 of the U.S. Internal Revenue Code and certain other governmental plans. <P> When you invest through your Transamerica Asset Management plan, you are investing in a separate account. Some of our separate accounts are internally managed funds, while others invest in outside mutual funds. However, due to our Administrative Charges and timing differences, the performance of these Separate Accounts will vary from the performance of the individual mutual funds available in public listings.
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What is the Standard and Poor's 500 Index?
Standard & Poor's 500 Composite Stock Price Index¨, also known as the "S&P 500" is one of the most common benchmarks for equity funds. The S&P 500 is an unmanaged index which assumes reinvestment of dividends and is generally considered representative of U.S. large capitalization stocks. It is composed of 500 common stocks of large-capitalization companies that are chosen by Standard and Poor's Corporation on a statistical basis. The 500 stocks, most of which trade on the New York Stock Exchange, represent approximately 70% of the market value of all U.S. common stocks. Each stock in the S&P 500 is weighted by its market value.
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What is Automatic Account Rebalancing?
Account Rebalancing is used to keep your investments distributed in the same percentages you originally select. This feature rebalances your account by redistributing funds among your investments (either one-time, monthly, quarterly, semi-annually or annually).
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What is Dollar Cost Averaging?
Dollar-cost averaging describes the technique of investing a fixed sum into a mutual fund at regular intervals. This is because, when you invest in a mutual fund, you are actually buying "shares" of the fund. You are using this technique when you make monthly contributions into your chosen investment option. <P> Dollar cost averaging helps reduce the average cost of each share of your investment option because when your investment account's performance is lower, you are purchasing "shares" at a lower cost. This allows you to acquire more shares in periods when your investment option's performance is lower and fewer shares when it is higher. This helps spread out your investment risk over time.
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My fund's performance has declined -- that's bad, right?
Not necessarily. Remember, when you invest in a separate account, you're actually buying "shares" of that account. When your fund's performance declines, it means you're paying less for each share, and therefore are getting more shares. As the fund's performance increases, so does the value of the shares you've purchased. For more information on other long-term investing techniques, see Dollar Cost Averaging.
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Can I get access to my money after I put it into a 401(k)?
Hardship withdrawals allow you to withdraw your money for a number of different reasons, such as to cover unreimbursable medical expenses, purchase of a primary home, payments of post-secondary tuition, or to prevent the eviction from or foreclosure on your home. You should be aware, however, that in nearly all cases, any distribution prior to your being 59 1/2 is subject to a 10% federal penalty tax, as well as a state tax (if applicable). In addition, the withdrawal must also be included as taxable income when it comes time to pay taxes for that year.
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Can I borrow from my 401(k)?
Certain plans allow employees to borrow against the amount contained in their 401(k). It depends on the provisions of your company's retirement plan. Not all plans allow for loans. Check with your plan sponsor.
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How can I determine how well my investment option is performing?
One of the best ways to determine how well your investment option is doing is to compare its performance with that of its "benchmark." Benchmarks are generally unmanaged indices of investment performance, such as the Standard & Poor's 500 Index.
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What is "vesting"?
Vesting is another term for who "owns" the money you have in your retirement plan account. Generally, this is determined by a) who contributed the money to begin with, and b) how long you've been employed by your firm. The contributions you make are always 100% vested, meaning any money you contribute to the plan always belongs to you. Many plans also feature "matching contributions," in other words, those your company makes for you to your account. Generally, the value of the amount of matching contributions you "own" increases in accordance with the amount of time you work for your firm. For example, you may own 20% of the value of the "matching contributions" after 1 year of service, 60% after three years and 100% after 5 years. Once you are fully vested, all contributions to the plan made on your behalf are yours to keep.
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Will I have to pay taxes on the money I invest?
The money you contribute to your plan is "tax-deferred." In other words, the money will not be taxed until you withdraw it and declare it as income.
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What is a Summary Plan Description?
A Summary Plan Description, or "SPD," is an abbreviated listing of plan provisions, including vesting rules for employer contributions, distribution rules, and grievance procedure.
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What is a "qualified" retirement plan?
A retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible for the employer and earnings on such contributions are tax-deferred while they remain in the plan and the participant is not taxed on the contributions or the earnings until they are withdrawn from the plan.
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If I change jobs, can I leave my retirement savings in my plan?
Yes. You may leave your savings in your 401(k) plan, although you may no longer make any contributions. You may also roll over your balance into another employer's 401(k) plan or into an IRA. A direct rollover into either plan will not be subject to taxes. If, however, you choose to have your account paid directly to you, you will be subject to a 20% IRS withholding; ordinary income taxes will apply and; a 10% IRS penalty may also apply if you receive payment before age 591/2
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What does saving tax deferred mean?
Saving tax deferred allows you to postpone taxes through investing in your qualified retirement plan. Tax deferral means that you pay no federal income taxes on any earnings as long as you keep your money in your retirement plan. When you withdraw money, however, you will pay taxes on it. Withdrawals prior to age 591/2 may also be subject to a 10% IRS penalty in addition to ordinary income taxes.
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What does it mean when my money compounds?
Compounding is the process through which your principal earnings are reinvested in your plan account and, in turn, generate additional earnings over time. Compounding helps your money grow faster.
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Are there different levels and types of risk associated with different securities?
Yes. Every choice you make concerning the way you save and invest your money involves some degree of risk. As a result, your financial health depends on understanding what the risks are and knowing how to balance them against the potential rewards.
 
 
Should I always try to avoid investments with the most risk?
Not necessarily. It is possible to invest too conservatively, which can mean running the risk of not earning enough to meet your retirement or other financial goals. Investing solely for safety of principal, therefore, may not be as prudent as you think. Investments that have very low risk and more stability tend to have lower returns and can often lose purchasing power over time because of the effects of inflation. Keep in mind that mutual funds are not insured and that investment returns will vary over time.
 
 
Why should I have a diversified portfolio?
Diversification means spreading your assets among a variety of investments to help control the risk of poor performance by any single security. When your investments in your portfolio are properly diversified, you improve your chances for achieving long-term growth.
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Why should I consider investing in mutual funds?
Mutual funds represent a quick, efficient, and cost-effective means of managing money. They provide professional management, ongoing supervision of your holdings, and automatic diversification, all important elements of a well-rounded investment program. Because shares can be redeemed on any business day, mutual funds provide liquidity, and because shares of a mutual fund are priced daily, you always know what your investment is worth. Investment return and principal value will vary with market conditions and an investor's shares, when redeemed, may be worth more or less than their original purchase price.
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When is a good time to start investing in mutual funds?
If you have not already started your investment program, the sooner you start, the better. Let time be your ally; the longer your money can work for you, the better your prospects for wealth-building. The secret is to invest regularly (regular investing does not ensure a profit or protect against loss in declining markets).
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Why are there different classes of mutual fund shares?
A growing number of mutual fund companies offer investors a choice in the way the sales charge and other fees are structured. Putnam offers class A, class B, and class M shares. Your financial advisor can help you determine the most favorable arrangement for your situation.
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How can I learn about fund performance?
You can check mutual fund information in the mutual fund listing of The Wall Street Journal, The New York Times, or your local paper. Fund information is typically alphabetized under the name of the mutual fund company.
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What is a fund share?
A fund share represents a fraction of all the securities (stocks and bonds) owned by the fund. The prices of these securities may change daily; therefore, the value of your fund share may change, too.
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What does NAV mean?
NAV, or net asset value of a stock, is the price at which one share was sold to the public as of the previous business day's market closing. The NAV of a mutual fund is determined by adding the value of all the securities in the fund's portfolio, subtracting debts and expenses, and dividing the result by the total number of shares outstanding.
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What does NAV change or net change mean?
The NAV change, if any, is the change in net asset value over the previous day's closing price.
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What does total return mean?
Total return is a measure of a fund's performance including reinvested dividends and capital appreciation. Listings may be calculated for different time periods and many newspaper listings will only provide this information weekly. Check for the time period being used.
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What is the "p" symbol?
The "p" shows that the fund charges an annual fee for marketing and distribution costs. (This charge is known as a 12b-1 fee, named after the 1980 Securities and Exchange Commission rule that permits it.)