Retirement plan fiduciaries have increasingly turned to tactical asset allocation strategies in hopes of better results.
The trend began with the financial crisis of 2008, when buy-and-hold strategies failed to deliver. Since then, concerns over monetary policy and asset class repricing, equity valuations, rising interest rates and a better understanding of participant risk tolerance have boosted interest in TAA.
Instead of taking a passive approach, TAA-managed funds promote themselves as offering a “dynamic” approach that adjusts portfolio allocations based on market conditions. Many 401(k) plans include target-date fund or target-risk investment options in their mix that use a TAA strategy of some kind.
Critics say studies of TAA funds show poor and inconsistent returns. Regardless, interest in TAA is up.
Marcia Wagner and John Sohn of The Wagner Law Group, in a white paper produced on behalf of The Center for Due Diligence, offered fiduciaries the following dozen best practices when working with tactical asset allocation strategies:
- Generally accepted investment theories: Gather information concerning the TAA strategy to assess whether the theories are generally accepted.
- Tactical constraints: Ensure that the asset allocation investment has a strategic asset allocation with a tactical overlay subject to reasonable constraints, ensuring the tactical changes comply with the regulatory mandate to achieve long-term appreciation and preserve capital.
- TAA’s impact on diversification: Gather information concerning the extent to which tactical changes may cause the asset allocation investment’s portfolio to become less diversified.