The increasingly popular retirement approach known as formulaic asset allocation may put savings at risk, according to a new study by the Compass Institute, a think-tank dedicated to investment strategy research for employer-sponsored retirement plans. FAA's such as lifecycle, target date, balanced funds, managed accounts and Monte Carlo simulation will not protect participants from risk because FAA approaches expose participants to the highest risks over market cycles.

Studies by the group show the average annual returns over market cycles is about 6% for an FAA and the minimum average annual returns needed over long-term market cycles to reach retirement income security by 65 is 12%. FAA provides only about half of the return needed.

The group says the "cruise control" nature of FAA strategies does not protect a plan over a severe down market, nor help the plan grow during an extreme down market.

Some of the other problems with target date and lifecycle funds are that they only take into account balances at an investor's current employer, they are rarely used as the "one-stop-savings tools" they are intended to be, and "even when used correctly, target-date/lifecycle funds don't recommend a boost in contributions to help employees ensure they achieve their target nest egg," said Jane White and Rick Meigs in an EBA story.

Free copies of the Compass Institute's report, "The Paradox of Asset Allocation for Retirement Plan Participants: A Blessing or a Curse" are available upon request by sending an e-mail to reports@compass-institute.com.