Dynamic Asset Allocation: Health and welfare plans

Trustees of health and welfare plans are faced with the task of balancing conservative investment postures, to ensure that short-term liabilities are covered, and more aggressive postures, to enable the plans’ longer-term assets to keep pace with medical inflation. Because most plans’ assets, recommended reserves, and cash flow positions are constantly changing, a fixed asset allocation may not meet their needs. In addition, other types of plans such as VEBAs, OPEB plans, and even some traditional pension plans with shorter-term horizons may benefit from adopting a dynamic asset allocation strategy.

A Dynamic Asset Allocation (DAA) structure potentially improves a plan’s ability to meet all benefit obligations (short- and long-term) by matching the horizons of the plan’s assets and its liabilities. When the plan’s short- or intermediate-term liabilities increase relative to total assets (e.g., through higher claims, or fewer hours and contributions), DAA moves the plan to a more conservative posture. This move ensures that the plan’s assets are invested less aggressively to match the shorter-term horizon of the plan’s liabilities. On the other hand, when the plan’s short-term liabilities decrease relative to total assets, DAA moves the plan toward a more aggressive posture.