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.
Recommended For You
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.
- Frequency of changes: Perform enhanced due diligence on a TAA advisor that utilizes frequent tactical allocation changes and confirm that each change is made in a disciplined manner in accordance with its investment theories.
- Factors given appropriate consideration: Gather information concerning the objective measures, like capital market data or governmental policies, that are being given appropriate consideration by the TAA advisor for purposes of its tactical changes.
- Retired participants: Gather information on the extent to which the TAA advisor gives appropriate consideration to retired participants when making tactical changes because they are taking distributions from the asset allocation investment.
- Expertise and experience: Consider the professional qualifications of the TAA advisor and its specific TAA-related expertise and experience.
- Identifying Investment goals: Gather and consider information concerning a TAA strategy's particular investment goals, like downside risk management or fine-tuning portfolio allocations.
- Contrarian-like tactics: Perform enhanced due diligence for any TAA advisor that utilizes contrarian-like tactics and gather information on the potential risk of loss associated with such tactics.
- Plan-level disclosures: Review the disclosures provided by the plan record-keeper under the 408(b)(2) regulations for designated investment alternatives and the TAA advisor's ADV brochure to gather relevant information concerning the TAA advisor and its TAA strategy.
- TAA performance monitoring: To determine whether the tactical allocation changes have added value, plan fiduciaries should consider engaging a financial advisor or consultant who can help them evaluate the strategy.
- Average participant standard: Consider including a brief description of the TAA strategy and its associated risks in the required DIA and QDIA disclosures for participants to help ensure that the average participant can understand what is being done.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
