The Engine of Your Retirement Planning: Why Cutting Costs Is Only Half the Battle

5 days ago
5 min read

Anyone taking out private pension insurance often looks at the price tag first. Are the costs low? Good. But beware: A cheap car won't get you to your destination if the engine is missing. In retirement planning, the cost structure is the bodywork, but the Asset Management (the investment strategy) is the engine. We explain the interplay between these two factors and why the scientific alignment of your portfolio is ultimately more crucial than the last tenth of a percentage point in fees.

The Visible Costs: The ABCs of Fees

To understand what is left at the end, we briefly need to clarify what gets deducted. In technical terminology, we distinguish between four official cost blocks:

Alpha Costs (Acquisition & Distribution): The one-off costs for setup and advice. (In fee-based "net policies," this is replaced by a separate honorarium).
Beta Costs (Ongoing Administration): The insurer's fee for managing the contract (usually a percentage of the contribution).
Gamma Costs (Capital Costs / Fees on Assets): This is where it gets expensive: These costs relate to the entire accumulated credit balance. The more money in the pot, the higher this amount becomes in absolute terms.
Kappa Costs (Unit & Event Costs): Fixed fees (e.g., €24 p.a.) or costs for special requests (e.g., unscheduled withdrawals, contract changes).

The Crucial Factor: Your Usage Pattern (Flexibility Costs) At the end of the day, it is not just the static cost structure on paper that decides your return, but how you plan to work with the contract. A contract that appears very cheap at first glance can work well for a standard saver—but can become a cost trap for others. Why? If you desire a high degree of flexibility—for example, making frequent unscheduled top-ups (Zuzahlungen) or partial withdrawals (Entnahmen)—many supposed "low-cost providers" are suddenly no longer so cheap.

The Trap: For such services, some insurers charge above-average fees.

Top-ups: Often trigger renewed Alpha and Beta costs.
Withdrawals: Can trigger administrative fees (Gamma/Kappa) that eat into your capital.

If these service costs are too high, they can negate the profitability of the entire contract. Therefore, costs are an important factor, but discussing your personal usage wishes is just as vital. We check not only the "sticker price" but also the cost of flexibility.

Interim Conclusion: Low costs are a starting advantage. But they are passive. They only prevent losses; they do not generate profit.

The Return Turbo: Asset Management

This is where we decide how much horsepower hits the road. Asset Management describes the intelligence with which your money is invested. Financial science provides clear insights here that are ignored in many standard policies.

A. Risk Tolerance (Strategic Allocation) The most important decision is not "which stock," but "which quota." The famous study by Brinson, Hood & Beebower (1986) proved that over 90% of investment success is determined by Asset Allocation (the split between stocks vs. bonds) – and not by timing (entry and exit points).The Consequence: Anyone with 30 years to go should choose a high equity quota to beat inflation.

B. Fund Selection: Releasing Hidden Brakes Excellent asset management does not select funds based on colorful logos, but on efficiency. Even within funds, invisible costs lurk that reduce returns:

Cash Drag (Unused Capital): Many fund managers hold a cash reserve of approx. 3–5%. This money is not working. An optimized portfolio avoids funds with high cash quotas.
Transaction Costs (Trading Costs): When a fund manager reallocates frequently, trading costs arise. Studies (e.g., by Mark Ortmann) show that these costs reduce returns internally without appearing in the standard Total Expense Ratio (TER).Solution: Good asset management uses efficient building blocks (like ETFs or factor-based funds) that are fully invested and trade infrequently.

C. Scientific Diversification (Factor Investing) Instead of betting on "star fund managers," pros use scientifically proven return drivers. This is called Factor Investing. You systematically overweight areas that have historically yielded higher returns:

Small Cap: Small companies often perform better than large corporations in the long run (Size Premium).
Value: Undervalued substance stocks.
Profitability: Highly profitable companies.

The Interplay: The Medal Has Two Sides

Why is this view so important? Because costs and returns are inseparably linked. The formula for your wealth is: Gross Return on Investment MINUS Product Costs = Your Net Return.

We often observe two mistakes in the market:

The "Cheapness Craze": A product has extremely low costs but offers only poor funds or forces you into a guaranteed interest rate. Result: The money doesn't get less, but it doesn't grow either.
The "Star Manager Illusion": A product relies on expensive, active fund managers supposed to beat the market. However, research shows (e.g., Fama & French) that almost no manager succeeds in doing this permanently after costs.

The Ideal: We seek balance. A lean cost structure (that doesn't act as a brake) combined with a scientifically sound asset allocation (that covers the broad market and avoids hidden costs).

The Compound Interest Lever (Why Return Makes the Difference) Why do we harp on about investment strategy so much? Because of the exponential effect. Many underestimate what an optimized portfolio can achieve over long periods.

A Model Calculation Example (€300 monthly savings rate, 35-year term):

Scenario A (Mediocre Investment): 5.0% Return after costs -> Final Capital: approx. €325,000
Scenario B (Slightly Improved): 5.5% Return after costs -> Final Capital: approx. €363,000 Effect: Just 0.5% more (e.g., by avoiding cash drag in the fund) brings almost €40,000 profit.
Scenario C (Optimized Asset Management): 8.0% Return after costs -> Final Capital: approx. €620,000 Effect: By fully exploiting historical market returns through a high equity quota and scientific diversification (factors), you have almost doubled your result compared to Scenario A.

The Conclusion of the Calculation: Saving costs is important. But the right investment strategy determines whether you "get by" in old age or are "wealthy."

Conclusion: We Look Under the Hood

At Karmartha, we do not rely on standard solutions. We analyze both:

We dismantle the costs (Alpha, Beta, Gamma, Kappa) to avoid unnecessary fees.
We optimize the Asset Management so that your money works globally diversified, scientifically grounded, and without hidden handbrakes.

Your retirement plan needs an affordable bodywork AND a strong engine.

Sources & Further Links

Bedeutung der Asset Allocation: Brinson, G.P., Hood, L.R., Beebower, G.L. (1986): "Determinants of Portfolio Performance". Financial Analysts Journal. (Belegt die 90%-Regel).
Versteckte Fondskosten: Ortmann, M. (2010): "Kostenvergleich von Altersvorsorgeprodukten".
Aktives vs. Passives Management: Fama, E.F., French, K.R. (2010): "Luck versus Skill in the Cross-Section of Mutual Fund Returns".

Legal Notice regarding this Article

No Guarantee of Returns: The calculation examples (e.g., 5%, 5.5%, or 8%) are purely model calculations used to illustrate the effect of compound interest. They do not constitute a forecast or guarantee of future performance. While a return of 8% corresponds to historical averages of global stock markets over long periods, it is not guaranteed for the future.

Risk Notice: Investments in financial markets are subject to fluctuations that can lead to the loss of the invested capital. Past performance is not an indicator of future results. The choice of investment strategy depends on individual risk tolerance.