New disclosure requires extra step for brokers
BY TOM AVERY
here’s a new federal broker compensation disclosure requirement that’s encouraging greater transparency in the benefits industry — and creating an extra step for brokers.
The Consolidated Appropriations Act (CAA) of 2021 [https://www.natlawreview.com/article/broker-and-consultant-disclosures-to-group-health-plans-under-division-bb] introduced new regulations about broker compensation. The goal is to improve transparency about the way brokers are paid beyond client transactions.
What does this actually look like for brokers in practice?
Yes, brokers now have to complete an extra step to remain in compliance. But the nature of the law also means that broker relationships with their clients could be affected.
When brokers have to disclose the compensation they receive for steering clients towards a certain package, will it cause clients to see the services brokers provide in a different light?
Now that brokers are receiving more guidance from the Department of Labor on what complying with this law means, it’s time to think ahead to client conversations.
Brokers who want to retain (and grow) their book of business need to start by asking themselves these three questions:
1. Do my clients understand how I’m compensated for the services I provide?
Because brokers have not previously had to disclose their compensation for providing healthcare products, clients may be unclear about how their broker is actually paid.
For example, employers may not know if their broker is
paid on a commission-based model and whether they would earn more as their client’s costs increase.
Once they have more information about how their broker is compensated, it will be up to employers to decide
- whether they believe their broker is actually providing them with the best health plan recommendation and
- whether the cost is worth the service.
If an employer is surprised by how their broker is compensated, or the broker feels uneasy about having to make this disclosure, it could mean big trouble for retention.
2. Is my book of business at risk?
More transparency means the plan sponsor has more leverage in selecting insurance products and negotiating with plan vendors.
If a client sees that their broker is pushing a plan for which the broker can reasonably expect a large amount of compensation — directly or indirectly — it could raise flags about whether the broker is actually committed to finding the client the best products. Employers may be keener to hire brokers who are providing the best value for their dollars now that they can see what they make on commission.
Sometimes, brokers may not be receiving much in terms of compensation or incentives from carriers. In that case, it will be even easier for the broker to show clients that they’re genuinely interested in providing them with the best plan.
It’s also very possible that the plan that is best for the client is also a plan that provides brokers with strong incentives. Brokers will need to go the extra mile to prove why that plan is the best and also be prepared to speak to all of the other things they’re doing for the client.
More transparency doesn’t have to be a bad sign for broker income. The updated disclosure rules for ERISA increased transparency and subsequently drove down fees and overhead costs for 401(k) plans, and brokers still did great business.
3. Am I doing enough for my clients?
Speaking of everything brokers do for their clients compiling these disclosures could cause some brokers to reflect on the services they provide to their clients in relation to their compensation.
For example, the new regulation puts some of the work on the plan sponsor to ensure compliance. However, brokers can be proactive by providing that disclosure information before the client even has to ask.
Note: The CAA establishes that plan sponsors can immediately terminate contracts with providers that fail to disclose this compensation.
Compensation disclosures are just one more compliance document that brokers need to provide. In terms of workflow, it shouldn’t be an issue to add it to the workflow for creating other compliance documents (assuming the broker has a process for automating client document creation).
The additional work comes from the need to do more to help clients cut costs and provide great services to their employees. For example, brokers can help clients improve their employees’ benefits package education by providing a custom benefit book. Brokers can also apply their expertise to help clients ensure they’re in compliance with ERISA.
For the proactive broker, CAA compliance will prompt them to find new ways of delighting clients and justifying their position as the client’s broker.
Be prepared for client questions ahead of broker compensation disclosure
As with ERISA, this broker compensation disclosure law will impact how health plan pricing is structured and possibly how brokers are compensated. In the short term, brokers will need to reevaluate how they position the services and value they provide to their clients.
TOM AVERY is the founder and president of Innovative Broker Services (innovativebroker.com), an independent boutique brokerage company and a Top-10 Employee Benefits Agency for 12 consecutive years (Sacramento Business Journal). Avery is also the founder and president of Signal Sync (signal-sync.com), an insurance industry SaaS and agency automation solution designed for the independent agency. He continually writes regarding the many challenges faced by today’s agencies and has developed Signal Sync to overcome these challenges.
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