Risk is inherent in any 401(k), 403(b), 457 or other defined contribution (DC) plan. Some of these risks – such as investment, credit and longevity risks – are shared by both the plan sponsor and the participants. With proper due diligence in selecting investment options and communicating participants’ responsibilities, plan sponsors can often avoid the most damaging consequences when negative events occur related to these risks.
One category of risk – operational risk – is the sole responsibility of the plan sponsor. When operational failures occur, plan sponsors often face severe damage to their reputations – and this potentially can lead to financial losses, litigation and even threatened tax status.
Operational risk can stem from:
These events can be grouped as relating to:
While many DC plan sponsors delegate parts of their operational risk management to service providers, clear oversight is still needed. Effectively managing operational risk can lead to improved service quality, reduced costs, improved participant decision making and strengthened compliance. A first step is adopting a framework that includes:
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