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August 1, 2007

Retirement Plan Participants Directed to Any Formulaic Asset Allocation (FAA) Approach— Lifecycle, Target Date, Balanced Funds, Managed Accounts and Monte Carlo Simulation—Are Exposed to the Largest Risks and Assured of Not Having Nearly Enough Money to Retire.

Chicago, IL.  The Compass Institute report—The Paradox of Asset Allocation for Retirement Plan Participants: A Blessing or a Curse—proves that unless an Adaptive Asset Allocation™ (AAA) Approach is used, Plan Participants can never achieve anywhere near the returns needed over Market Cycles to provide them with Retirement Income Security.

Moreover, despite promises of safe harbor and 404 (c) protections, plan sponsors will have a nearly impossible task defending in a courtroom having directed complaining Participants to any FAA approach.

Chicago, IL.  Comprehensive studies by Compass Institute, a think tank dedicated to research and analysis of investment strategies applied to existing Retirement Plans or IRAs, reveal that, contrary to claims—that using Formulaic Asset Allocation (FAA) approaches such as Lifecycle, Target Date, Balanced Funds, Managed Accounts and Monte Carlo Simulation will protect Participants from risk—FAA approaches expose them to the highest risks over Market Cycles and assure their not having nearly enough money for retirement.

The studies presented demonstrate why an Adaptive Asset Allocation™ approach—such as HORIZON™ AAA—is the lowest risk over Market Cycles and can be expected to provide Plan Participants with Retirement Income Security by age 65.

Report Highlights:

      Recognizing that the Average Annual Returns (AAR) and Plan values being realized by most Plan Participants are woefully insufficient to provide them with Retirement Income Security, plan sponsors are introducing Participants to Advice Providers and/or Qualified Default Investment Accounts based on FAA approaches.

      However, Retirement Income Security (RIS) is not obtainable following FAA models due to: 

      The “cruise control” nature of an FAA strategy, meaning that it cannot protect Plan value over a severe Down market, nor can it achieve the needed Plan value growth once it has encountered an extreme Down Market.

      The fact that even in the highly unlikely case of there not being a single severe Down Market over the life of the Plan, the barrier to AAR of any FAA strategy prevents growth to needed final Plan value.

            The average AAR over Market Cycles is shown to be: FAA = 6.4%, HORIZON™ AAA = 14.1%.  However, the minimum needed AAR over long-term Market Cycles to reach RIS by age 65, is shown to be between 10% and 12%; FAA provides barely 50% of the return needed.

      The inability of increased contributions to overcome the low AARs achieved in actual application of any FAA strategy; the increases are so substantial that typical Participants cannot afford them or run into legal contribution limits.

      The fallacy of looking only at end point AAR results which masks the vulnerability of all FAA approaches to the: devastating Time of Start Risk, Time of Retirement Risk and Treadmill Effect— vulnerabilities HORIZON™ AAA neutralizes.

The report discusses and compares the results obtained from using multiple types of FAA approaches vs. AAA for:

      Qualified Default Investment Alternatives (QDIA) had they existed for 10 years (i.e., starting in 1997.)

      Company-Sponsored Retirement Plans and IRAs.

An Appendix discusses:

      Key Questions and specific issues regarding FAA and AAA.

      A caution to plan sponsors regarding the “Safe Harbor” that FAA is presumed to provide.

 Studies and concepts contained in the report:

             The goal of asset allocation for the Plan Participant is to provide an investment strategy that will guide him or her to realistic Retirement Income Security with low risk over market cycles. 

             The report analyzes two hypotheses for the Participant to achieve this goal.

            Hypothesis 1:  A Formulaic Asset Allocation (FAA) Strategy

            Hypothesis 2:  An Adaptive Asset Allocation™ (AAA) Strategy

             The hypotheses are evaluated against critical criteria over different Market Cycles, including:

            The Time of Start Risk (Market Cycle position when Participant starts a Plan)

            The Time of Retirement Risk (Market Cycle position when Participant retires)

            The Treadmill Effect (time and extent of recovery of Plan value after a severe Down Market.  The repeated gravitation of FAA Plan values toward Money Market fund returns during each Down Market.

            Minimum contribution levels for Participant to reach RIS by age 65 as a function of AAR

            Years until retirement savings are exhausted after retiring at age 65

      Evaluation of the performance of Qualified Default Investment Alternatives (QDIA) had they existed for 10 years (i.e., starting in 1997.)

      A Diagnostic™ is discussed that quantifies the expected long-term AAR over Market Cycles of FAA and of AAA strategies applied to an existing and/or contemplated company-sponsored Retirement Plan.

Free copies of this 42-page Report, 37-page Appendix and/or a 2-page Abstract and 13-page Report Overview are available upon request by sending an email to [email protected]. 

You may also contact Compass Institute to schedule an interactive individual or team Web-based meeting summarizing the report highlights with a principal of Compass Institute.

Contact Information

Elliot Fineman, Senior Vice President

[email protected]

Main Office: (866) 54-COMPASS

About Compass Institute, LLC Compass Institute

The Compass Institute is a private think tank dedicated to investment strategy research for existing company-sponsored Retirement Plans. The performance-backed HORIZON™ Adaptive Asset Allocation™ solution was developed during a 5-year independently funded research project conducted by the Institute.

HORIZON™ AAA is currently in use nationally by Participants in sponsored Retirement Plans at companies and organizations including Accenture, PWC, Merck, State Universities Retirement System of Illinois, University of Michigan, SAP and IBM, as well by IRA Plan holders.

Plan-specific performance results have been audited by Ashland Partners & Company LLP, a worldwide leading firm that audits reported performance results.

Access by the public sector to the discoveries and advancements made at Compass Institute is provided through its affiliate, Compass Investors, which can be found on the Web at www.compassinvestors.com

Compass Institute and Compass Investors are members of the Plan Sponsor Council of America (PSCA). Established in 1947, PSCA is a national, nonprofit association of 1,200 companies and their 5 million employees.  Among other activities, PSCA represents its members' interests to federal policymakers.


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