New Approach Protects Retirement Savings in Market Crashes

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Data Science Partners Unveils Proven Mechanism Allowing Investors and Financial Institutions to Significantly Benefit from Participating in Insurance Policy Approach to Retirement Accounts

"Most of the widely-used retirement investment vehicles offer individuals little if any protection from severe market downturns."

Data Science Partners, a New York-based financial and economic consulting firm, today announced that it has published ground-breaking research on a unique and innovative approach that enables investors to limit their downside risk in retirement savings plans and potentially earn higher average returns.

The firm’s new risk-mitigation method for retirement investments, called Downside Risk Protection or DRP, also enables financial institutions offering this portfolio insurance vehicle to create a differentiated and profitable service designed to increase the likelihood of accumulation, retention and growth of customers’ retirement assets.

DRP is a proven mechanism that limits significant losses in retirement accounts, which is especially important for those in their prime income-generating years in the 30s and 40s age-bracket. The idea for DRP was created because the majority of today’s retirement accounts—401(k)s, IRAs and other self-directed plans—are highly susceptible to major downward moves in markets.

Unlike pension plans, which provide steady retirement income but are rapidly disappearing as a retirement savings plan option, self-directed plans leave retirees exposed to the risk of outliving their assets. Individuals face the risk of a self-directed plan’s uncertain income stream during retirement.

DRP is comparable to an insurance policy, in which investors would pay a premium to insure them from incurring large losses in their retirement accounts. By reducing the occurrence of downside risk in these accounts, investors greatly lessen the possibility of early account depletion during their retirement time horizon.

Financial analysis of DRP found that the likelihood of individuals outliving their assets over a retirement period of 45 years drops from nearly 15 percent to 4 percent with DRP. This approach also increases the portfolio’s average returns while decreasing portfolio volatility.

For example, in an all-equity portfolio, investor losses are capped at a maximum 15 percent on an annual basis in the years that the retirement accounts sustain losses. On the other hand, in the years when the account posts a gain, the account holder gives up 10 percent of the gain to the financial institution offering DRP for the account.

Financial institutions can attract and retain customers with DRP
For financial institutions, DRP is an extremely desirable product that can be used to attract and retain 401(k), IRA and other self-directed plan customers. DRP can be profitable for financial institutions because the occurrence of a major market downturn is rare, as historical data reveals that an annual loss worse than 15 percent has occurred only 10 percent of the time.

Financial institutions can use DRP with any equities or fixed-income portfolio, given an appropriate downside floor and upside payment depending on the asset mix. It also offers institutions the flexibility to design its own framework with investors.

Data Science Partners Chief Executive Alexander Rinaudo commented: “As more Americans are living longer, they face the increased risk of outliving their retirement income. Most of the widely-used retirement investment vehicles, 401(k)s, IRAs and other self-directed plans, offer individuals little if any protection from severe market downturns -- such as the Great Recession of 2008 which wiped out trillions of dollars in Americans’ retirement savings. Those self-directed retirement plans expose individuals to the heightened risk of not being able to enjoy the retirement lifestyle that they had pinned their hopes on during their income-generating years.”

Rinaudo added: “To avoid outliving one’s retirement nest egg, we developed the Downside Risk Protection approach, in order to significantly reduce the impact of a severe market correction on an investor’s retirement asset portfolio. DRP can be compared to any insurance policy, with individuals paying a premium as protection against the occurrence of heavy losses in their portfolio. DRP also enables investors to potentially earn higher average returns on their investment, contributing to reducing the risk of early account depletion.”

A copy of the published research on Downside Risk Protection can be obtained at http://www.capco.com/insights/capco-institute/journal-45-transformation/downside-risk-protection-of-retirement-assets-12, or send an e-mail to inquiry(at)datasp.com.

About Data Science Partners
Data Science Partners is a New York-based financial and economic consulting firm that creates client opportunities through rigorous data-driven applications.The firm has extensive experience and expertise in providing complex modeling of financial instruments and has established a comprehensive network of relationships with leading academic and financial institutions. For more about Data Science Partners, go to http://www.datasp.com.

Media Contact
Marc Weinstein
Ascent Communications
Ascent1957(at)gmail.com
(908) 967-9958

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