I would use a 1/4" compression bit to do the bulk of the cutting, followed by a 1/8" bit for the places the 1/4" bit can't get to. Is there a reason to use the 1/16" bit? I've cut plenty of gears with 1/4" and 1/8" and they have worked great.
For the gears I cut I just used a screw in the center (hole cut with CNC to ensure being in the center).