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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