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PR Newswire - Press Release
Retirees Face Certain Failure Using Lifecycle, Target
Date and Balanced Funds, 10-Year Research Study Proves
09.11.07, 7:01 AM ET
CHICAGO, Sept. 11 /PRNewswire/ -- Comprehensive studies by Compass
Institute, a think tank dedicated to research and analysis of investment
strategies, proves that retirement investment strategies that use
Formulaic Asset Allocation (FAA) approaches such as Lifecycle, Target
Date, Balanced Funds, Managed Accounts and Monte Carlo Simulation, will
unequivocally fail to provide participants with adequate savings for
retirement.
"Employees investing in their company's 401(k) Plans have been led to
believe that they will be set for retirement and protected form undue
risk by opting into funds that are keyed to their age, expected
retirement date, and appetite for risk," Compass Institute Senior Vice
President Elliot N. Fineman said. "Our research shows in fact just the
opposite will happen. Formulaic funds by their very nature limit the
upside in up markets and maximize losses in down markets. The result
will be impoverished retirees, the highest of all risks."
A ten year research study by Chicago-based Compass Institute showed that
investments in unrestricted (no asset class preference) objective (no
attempt at future predictions) funds where the asset allocation adapts
to known, not forecasted or probable market information, provides
retirees with the best annual average returns over a complete cycle. A
10-year review of this approach, called UO-AAA (Unrestricted
Objective-Adaptive Asset Allocation) showed average annual returns over
market cycles of 14.1%.
Personal finance experts agree that after retirement individuals will
spend the equivalent of their final annual salary each year. The
Employee Benefit Research Institute (EBRI) reports that the median
401(k) balance is $67,000. Fidelity Investments recently reported that
the average couple will spend a minimum of $250,000 on healthcare alone
after they retire. The vast discrepancy between anticipated spending
versus anticipated savings will leave many retirees in dire straits.
Compass Institute has calculated that unless investors are earning an
average annual return (AAR) of 12% over the life of their 401(k)s, their
retirement funds will be woefully short.
"The problem with an FAA investment strategy is that it is never able to
overcome the effects of a single down market that will inevitably occur
during the life of a retirement plan," Fineman said. "FAA strategies are
on 'cruise control' and disregard changes in market conditions, which
put participants in these plans on the road to disaster."
Report Findings Highlights: -- FAA strategies fail to deliver the
required 12% AAR needed for retirement. -- A 10 year review of FAA
performance shows that investments starting in an up market had an AAR
of 8.8% with the best performing life cycle funds and 6.9% in the worst
performing funds (vs. 3.7% in money market funds). -- A 10 year review
of FAA plan performance shows that investment plans starting in a down
market had an AAR of 4% in the best performing funds and 2.9% in the
worst performing funds (vs. 3.0% in money market funds). -- The AAR over
market cycles in the best performing funds was 6.4%. -- Investments
using an UO-AAA strategy (Unrestricted, Objective Adaptive Asset
Allocations) produced the following results during the same 10 year
review. -- Investments that started in an up market yielded an AAR of
16.2%. -- Investments starting in a down market yielded an AAR of 11.9%.
-- AAR over market cycles was 14.1%. "The goal of the UO-AAA approach is
to grow the value of the retirement plan by age 65 so that when it alone
is invested in a 5% annuity or bond, the annual interest will be equal
to the salary at age 65," Fineman explained. "To do that, a plan value
will need to be 20 times the employee's final salary. With the 12%
annual average returns that we have seen in the UO-AAA strategy, a 6%
participant contribution and 3% company match that is achievable. "
Free copies of this 42-page Report, 37-page Appendix and/or a 2-page
Abstract and 12-page Report Overview are available upon request by
sending an email to [email protected].
About Compass Institute, LLC Compass Institute
The Compass Institute, LLC, is a private think tank dedicated to
investment strategy research for existing company-sponsored Retirement
Plans. Access by the public sector to the discoveries and advancements
made at Compass Institute is provided through its affiliate, Compass
Investors, LLC, which can be found on the Web at
www.compassinvestors.com
SOURCE Compass Institute, LLC |
