According to a new white paper from The Center for Due Diligence “TACTICAL ASSET ALLOCATION & ERISA PLANS: Best Practices for Finding the Right Strategy for Plan Participants“:

Looking for ways to stabilize returns and manage downside risk, the interest in Tactical Asset Allocation (TAA) strategies has increased. This was initially driven by the 2008 financial crisis, where diversification of asset classes did not provide participants with downside protection. Fueled by concerns over a transitioning monetary policy and asset class repricing, today’s equity market valuations, changing interest rate environment and a better understanding of participant risk tolerance has further increased interest in TAA. This trend could impact the rosy projections for target-date funds and the market share held by the dominant providers.

Given today’s investment dynamics – heightened risk for equities as well as bonds – astute investment advisors are increasingly questioning the prudence of modern portfolio theory. The DOL’s recent Tips for ERISA Plan Fiduciaries may also have sparked the desire for more oversight through custom solutions.

While somewhat limited in application, many proprietary target date fund managers already use a tactical overlay. Until now, there was very little guidance for plan fiduciaries to help them understand the different types of core TAA strategies, let alone evaluate the suitability of a particular strategy for their individual plans.

Separating analytically disciplined TAA strategies from high risk “market timing” type strategies, the CFDD’s exclusive white paper on Tactical Asset Allocation & ERISA Plans will become an invaluable resource for plan sponsors, investment advisors and product manufacturers considering TAA strategies. It will also spearhead the need for tactical transparency and accountability.

TAA contemplates dynamic changes based on current conditions. In addition to requiring special skills and being more complex than traditional approaches, TAA managers may have different goals and trigger methodology. Offered in conjunction with the Wagner Law Group – one of the nation’s most prestigious ERISA law firms – the white paper provides a conceptual overview of legal standards, core fiduciary principles and QDIA applications that will benefit both the experienced and those considering tactical strategies for the first time.

In addition to providing the analytic framework for evaluation, the white paper includes a checklist of best practices and key considerations for plan fiduciaries considering TAA strategies. Moving beyond the marketing hype, the white paper empowers plan fiduciaries with the knowledge to understand/evaluate TAA strategies and ask the right questions. It also paints a realistic picture of the rewards, risks and limitations of these wide ranging strategies.