Commissions vs. Fees

How do you compensate your employee benefits broker?

It’s really a very simple question. How do you compensate your employee benefits broker? Employers rarely provide a detailed answer or have a complete understanding of the dollars flowing to their broker.

In order to control your organization’s employee benefits costs you need to have an understanding of the cost drivers within your employee benefit programs that are controllable and then take corrective action. If you are an employer with over one hundred benefit eligible employees then one of the drivers you need to understand is the method you use to compensate your employee benefits broker- Commissions vs. Fees.

As employee benefits consultants we know that one of the first items to look at to assist employers in lowering the trajectory of future cost increases is how the current broker or advisor is being compensated. No, we are not talking about a race to the bottom to see which brokerage firm can provide their services for the lowest annual cost. We’re talking about how employers compensate their employee benefits broker.

The typical arrangement is on a commission basis. The brokerage firm receives a percentage of your medical premiums as compensation for their services. You pay your medical plan premium to the insurance carrier or Third Party Administrator (TPA) and they, in turn, pass the agreed upon commission dollars to the broker. While the commission may be a fixed percentage from year to year, left unchecked the actual dollar amount your brokerage firm is receiving each year is increasing, mirroring your medical premium increases. This compensation is disclosed on your Schedule A and then in your annual 5500 filing.

Does this make sense?

So let’s think about this for a second. Your medical premiums are rising each year due to several cost drivers, some within your control and some not: Utilization within your group, medical inflation, pooling or stop-loss charges, premium taxes, PPACA fees and so on. A brokerage firm compensated on commission (a percentage of premiums) is receiving an increase in compensation based on the increase of each of these factors added together year after year. You receive a 7.8% medical premium increase and your broker’s compensation goes up 7.8%. In what universe does this make sense for you, the client? A much better approach is to compensate the brokerage firm on a flat fee basis, removing this automatic lift in compensation every year.

Compensation tied to actual value & services provided

With a flat fee arrangement, the broker’s interest and your interests become aligned. You want to ensure you have the lowest possible benefit costs and now the broker has a burning desire to control those costs in order to justify their existence because you, the client, are directly paying their fee. The broker is no longer being compensated with your dollars in the background through the insurance carrier or TPA.

In a commission scenario, how upset is your broker really going to be if you accept a 7.8% rate increase on your medical plan? Their commission just went up 7.8%! What extra value did the brokerage firm or broker provide to justify the 7.8% increase in their compensation? Under a flat fee arrangement, the broker’s fee to manage your medical program may increase but the increase will be tied to increased value and services, not medical premium increases.