Future Proofing Benefit Systems

Another way to think of future proofing is that a system can be said to be future-proofed when it is both flexible and also adapt to an increasing size of demand.

Many plan sponsors made big moves in 2022, including changes to their plans to include more participants and to broaden their benefits. They also set their sights on incorporating the changes SECURE Act 2.0 brought. And now, with all of the changes having been realized and in process, those sponsors may want to take stock of what’s next. That might mean analyzing their current systems with risk management and risk mitigation in mind.

Plan sponsors may already be working with their financial advisors on investment monitoring. That process is slightly different that risk management for plans and benefits systems. We’ve noted that “Investment Monitoring, sometimes called Investment Oversight or Investment Monitoring and Oversight, is growing field of advisory services that blend traditional accounting oversight skills, like tax basis analysis and verification, with other compliance-like skills, such as internal control evaluations and risk assessments. It makes sense that in the last ten years, as the field of corporate compliance and risk management grew to meet new regulatory demands, the same concept would migrate into … investing.”  We’ve also addressed the difference between risk management and standard due diligence. “Investment monitoring and risk assessments aren’t the same as due diligence or ordinary prudence. The difference lays in the strategy. Every financial advisor should, to meet their ethical obligations, fully investigate an investment prior to purchasing by reviewing all relevant, available, information. A risk assessment looks towards a specific individual or company’s circumstances, their vulnerabilities and the regulatory structure involved in their investing.”  Risk management is more extensive. It involves identifying and analyzing risk, planning a response, and mitigating and monitoring for future risk.  Many companies moved towards an enterprise-based approach to risk management in the mid-2010s. Enterprise-based risk management puts these several tasks into the hands of the risk manager, who then creates a more cross-functional or cross-department approach to working on risks.

However, as risk management has continued to improve with greater tools and better cross-functional workgroups, a positive from the pandemic, there may be reasons why a plan sponsor would want to consider risk planning for their systems. Plan sponsors may be able to find many helpful guides that will point them to specifics in strategies for managing benefits systems risk. Many of those strategies are focused on market threats, such as inflation and performance, as well as governance issues, like fees and compliance. Sponsors may want to think on a more comprehensive level about their benefits plans as a system. That means, they may want to consider more than the risk of investments and regulations.

A novel approach that approaches assessing risk from a different angle might help plan sponsors who want to consider the longer-term health of their benefits systems as a whole. A benefits system, in this context, includes the technology, vendors, equipment, storage, and human capital involved in the day-to-day operations of the benefits plans. Increasingly creative computer hackers can disrupt the benefits system even without a successful hack, if the technology used by the benefits administration staff can’t keep up with increased security. You can imagine that an enhanced firewall on a corporate internet system that causes employee benefits dashboards to move like a diesel truck driving uphill in a Vermont winter would make employees unhappy. And those unhappy employees’ complaints could swamp the administrative staff, bogging down their ability to perform their duties.

A systems approach to risk management might include future proofing, the idea of working with the known unknowns and developing skills to make the unknown unknowns determinable. Known unknowns are those future events that could happen but might not. Unknown unknowns are those things that could come up but can’t be planned for. Future proofing, in other words, is the process of examining possible future events (“PFE”s) and developing processes and systems to minimize the impact of those PFEs.  

At its core, a system, project or company is “future-proofed” when it continues to retain its value and relevance into the future. A system can be future-proofed when it’s built with adequate employee feedback to evolve systems and report safety issues.  Another way to think of future proofing is that a system can be said to be future-proofed when it is both flexible and also adapted to an increasing size of demand. As retirement plans grow, adapt and change with increased participant rolls and changes to benefits, plan sponsors may want to have open conversations with their administrative staff about how to ensure those systems stay relevant and capable of adapting.

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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