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Investment basics
- Investment classes
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- Associated risks
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- Glossary of terms

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Investment classes

Your plan offers you the opportunity to allocate your contributions in various investment options. These options are called separate accounts and they are contained within an investment contract — a group variable annuity contract. Each separate account invests in either a series fund managed specifically for the separate account or an underlying mutual fund. In addition to those variable account options, you may be able to choose a guaranteed account which provides safety of principal as well as credit a competitive interest rate. Each of your plan’s investment options concentrates on an investment category or "class" of investments. Rates of return will vary over time. Contributions allocated to variable investment choices can lose value and may be worth more or less than originally invested when redeemed. The categories are described below:

Fixed income investments are interest-bearing vehicles, the most common of which are bonds. Bonds are essentially "IOU’s" plus interest issued by corporations or the government to raise money over a specific period of time. That duration of time can be short-term (1-3 years), intermediate (4 to 10 years) or long-term (10 years or more). Depending on interest rate fluctuations, a bond's value in the market may rise and fall. Generally, the longer the maturity of the bond, the higher the interest rate risk. Bonds issued by institutions that are financially weak will generally have higher interest rates and may have generally higher risk of default than bonds of strong issuers.

When you invest in equities or equity portfolios (also known as stocks or stock portfolios), you are part owner of a company or companies. Equities rise or fall in value according to how attractive they are to buyers and the general conditions of the broad stock market. Equities are usually further categorized into the following classes:

Large company and small company stocks
Stocks of large, well-established companies with a long earnings history are considered large capitalization equities or large company stocks. Performance of large company stocks can be more reliable than small stocks. That’s because large companies often have broader, more diversified product offerings and stronger financial bases. In contrast, small companies often sell a more limited range of products, can have marginal financing and a relatively small management group, but they can grow faster than large companies, and their stocks reflect this. They often have the potential for fast growth, but more risk than larger companies.

Domestic and international stocks
Equity portfolios that invest primarily in U.S. companies are considered domestic equity portfolios. Equity portfolios that invest primarily in foreign companies are known as international equity portfolios.^*

Value and growth stocks
Value and growth refer to two distinct approaches to investing. Value stocks are stocks that are considered to be undervalued, either according to their book value or their current or projected earnings. These stocks can be those of smaller less well-known companies and may be more volatile than those of larger companies. Growth stocks are stocks that have shown or are expected to show rapid earnings and revenue growth. Historically, value and growth stocks have tended to show investment growth at different points in the economic cycle, which is why many investors include both of them as a method of diversifying their portfolios.

The most common investment in this category is a money market portfolio. Money market portfolios invest in the very short-term IOU’s of the government and highly rated corporations. Although money market instruments are generally viewed as relatively safe investments, their potential return is fairly low.

In addition to the various asset classes you’ve learned about here, your retirement plan may also offer additional specialized options that provide further opportunities for diversifying your portfolio. They may have features of one or more of the asset classes described previously. Some examples include:

High income bond portfolios
High income bond portfolios generally invest in bonds issued by companies without strong financial credentials. They generally pay higher yields than investment grade bonds, but they may have a higher degree of risk.

Balanced portfolios
Balanced portfolios include a mix of equities, fixed income and money market investments. They offer the potential for income and growth. Professional money managers decide how much of each asset class the portfolios will hold and adjust the mix over time.

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^*Investment risks associated with international investing, in addition to other risks, include currency fluctuations, political and economic instability and differences in accounting standards.