Aggregate Level Cost Method

  

The aggregate level cost method represents a way to figure out the finances of a pension plan. It estimates the costs and benefits that will likely be associated with the plan over the course of its life.

Rather than making the calculations on a person-by-person basis, this process looks at all the people in the plan as a bundle. That's why it's called "aggregate level"; it's looking at things in aggregate, or in total, rather than piece by piece. The goal here is to try and ameliorate sketchy marketing claims that a fund is ‘super low cost' when, in reality, with all kinds of hidden fees...it ain't.

Related or Semi-related Video

Finance: What is a Pension?31 Views

00:00

finance a la shmoop. what is a pension? well it rhymes with tension, and likely

00:08

for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]

00:12

another state employees pension that's backed up by a state that's going

00:16

bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people

00:21

well a pension is another term for a retirement fund. but what's special about

00:26

a pension is that the employer essentially forces you to put away money

00:31

for your retirement and then they invested for you.

00:35

how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]

00:39

employed ditch-digger might get a contribution of say 10 grand a year into

00:42

her pension, and that's each year 10 grand of forced savings for as long as

00:47

she you know digs ditches for the state. and in some states where the unions are

00:51

strong in the governing financial knowledge is weak the government

00:55

guarantees a minimum financial return on the pension investment made on behalf of

01:00

the employees. that is in California for example the state guarantees a 10% per

01:06

year return on their invested pension savings. if the invested return like [equation]

01:11

investing it in Wall Street and stocks and bonds and private equity funds and

01:15

all that stuff well if that invested return is less than that number less

01:19

than that 10%, then the state rights to the pinch and a check to cover the

01:23

incremental difference. yeah it's a huge Delta and it's well pretty much why you

01:28

a Californian Illinois you're going bankrupt remember. Jesus Saves

01:31

but Moses invests. [ Moses, holding stone tablets glares and demands interest]

01:35

Up Next

Finance: What are Pension Liabilities?
23 Views

What are pension liabilities? Pension liability is the difference in what an entity owes in pension payments versus how much they have on hand to c...

Find other enlightening terms in Shmoop Finance Genius Bar(f)