DC Plans Face Often-Overlooked Operational Risks

In today’s environment, market risk tends to receive the most attention from the media and from stakeholders, but managing operational risk has become more important as plans have grown in size and complexity. Many experts believe operational risk, rather than market risk, is the leading threat to a plan’s reputation due to the breadth and complexity of the individual risks in this category.

Operational Risk in Context: Other DC Plan Risks

Operational Failures Can Lead to Losses

For DC plans, operational risk encompasses potential losses attributable to failures in Internal Revenue Code (IRC) compliance, participant financial reporting, transaction processing, data security, technology, business continuity and vendor management.

Print an overview of operational risk.

Potential Consequences

The consequences of operational risk failures can be severe, including sizeable losses, litigation or threatened tax status of plan assets.

Benefits of Managing Operational Risk

Effectively managing operational risk may lead to improved service quality, reduced costs, improved participant decision making and strengthened compliance.

A first step is adopting a framework that includes:

• Governance structure
• Audits and assessments
• Management of cybersecurity risks
• Peer reviews and benchmarking
• Comprehensive investment policy
• Key performance and risk measures

Learn More about Recognizing and Managing Operational Risk in Segal’s Publications:

• Operational Risk Is the Achilles’ Heel of DC Plans: A Framework for Managing It
• Changing DC Plan Recordkeepers Can Be Complex: Steps for a Smooth and Successful Transition
• Roles and Responsibilities When Changing DC Plan Recordkeepers  
• Managing Cybersecurity Risk in DC Plans
• Defined Contribution Plan Cost-Effectiveness and Fee Transparency
• Compliance Is a Critical Component of Operational Risk in DC Plans