Aligning Controls With Risk: A Framework for Employee Benefit Plans

Effective internal controls are not one-size-fits-all. They must be tailored to the specific risks faced by an organization. For employee benefit plans (EBPs) and labor organizations, this means aligning control activities with operational, financial and compliance risks that are unique to their environments. A structured framework, such as the COSO model, which is an internal control – integrated framework that provides a practical approach to evaluating and adapting controls to meet these needs.

Risk Evaluation

1. Define Objectives

Begin by clarifying the purpose of the risk assessment. For EBPs, this may include safeguarding plan assets, ensuring accurate reporting and meeting ERISA requirements. For labor organizations, objectives may focus on protecting dues revenue, maintaining transparency and complying with labor regulations.

2. Identify Risks

Identifying risks is a critical step in maintaining an effective control environment, particularly for benefit plans and union operations. This process involves identifying potential threats that could disrupt financial integrity, compliance or operational efficiency.

Organizations can use a combination of interviews, surveys and reviews of historical incidents to gather insights from plan administrators, union representatives, payroll staff and auditors. These methods help reveal risks that may not be immediately visible in documentation or routine processes.

Key questions to guide this assessment include:

3. Analyze Risks

Once risks have been identified, the next step is to analyze them in terms of likelihood and potential impact. This evaluation helps organizations prioritize which risks require immediate attention and which can be monitored over time. Common tools used in this phase include risk matrices, which visually map risks based on severity and probability, and expert judgment, which leverages the experience and insights of subject matter experts. It’s important to recognize that risks rarely exist in isolation. Interdependencies between risks can amplify their effects.

For Example: Administrative Errors

Finally, documenting the risk analysis process is critical. Clear records support transparency, facilitate communication across departments and provide a foundation for ongoing monitoring and review.

4. Evaluate Existing Controls

Map current controls to the identified risks and assess their effectiveness. Are controls operating as intended? Are there gaps or overlaps? Document any deficiencies that could expose the organization to risk.

5. Develop Mitigation Strategies

Prioritize control gaps and outline a plan to address them. This may include:

6. Implement and Monitor

Execute the mitigation plan and establish mechanisms for ongoing monitoring. Dashboards, internal audits, checklists and feedback loops can help ensure controls remain effective as risks evolve.

Adapting COSO Framework to Risk Type

Controls should be selected based on the nature and severity of the risk:

To remain effective, controls must be:

Final Thoughts

For EBPs and labor organizations, aligning internal controls with risk is essential to effective governance. Applying a structured framework and adapting controls to the nature of the risks, helps strengthen governance, protect assets, and build trust with stakeholders.

Be sure to explore the additional articles in this internal controls series, Strengthening Internal Controls: A Strategic Imperative in the Digital Era and Implementing Effective Controls: Best Practices for Employee Benefit Plans, for further insights and practical guidance.