Understand How Different Broker Fees Can Impact Your Benefits Plan Cost

Posted in: Employee Benefits

Are your broker fees out of control? Are you frustrated by increasing employee benefits costs? Do you feel like you’re getting your money’s worth?

If you’re asking these questions, you might want to start paying closer attention to what you are paying for in your benefits plan. While there are many factors that go into determining your rate, your broker fee is a particular factor that can have a huge impact on your overall plan cost. Let’s review the ways different compensation structures affect your bill, and how you can make sure you’re paying a fair rate.

What Are Your Employee Benefits Broker Compensation Options? 

The three main compensation models you may come across are the Percentage Based Commission model, the 

Percentage Based Commission Model  

• Pro: In the percentage-based model, a simple percentage of premium (the broker commission) is factored into the coverage your company offers. This model is often the standard method at various carriers. Therefore, it is convenient for you as it takes the thinking out of the equation. Often this percentage can be negotiated with your broker, but that is carrier dependent.
• Con: The incentives for the broker and the client are misaligned in this model. Let’s say a broker client agreement has 5% commission and the client receives a 20% increase at your next renewal. The client is now faced with a large rise in costs to simply keep their plans the same as they were last year. On the broker side, their client just became 20% more profitable without adding any value.

Per Employee Per Month (PEPM) Commission Model 

• Pro: In the PEPM commission arrangement, you are only responsible for paying a set rate per employee per month. This compensation model is often more beneficial for smaller to mid-market businesses that are growing. Under this employee benefits broker commission model, your broker is incented to design benefits offerings that will help you attract talent.
• Con: However, as your business begins to scale, the PEPM compensation model may no longer make sense because your rate can significantly increase. When that happens, it’s time to renegotiate your PEPM rate if you would like to stay with this benefits broker commission model, or you can move to a flat fee rate arrangement.

Flat Fee Rate Commission Model 

• Pro: A flat fee commission model is often more accommodating for larger companies because they can negotiate better terms given their size. By negotiating a flat fee, your team can more accurately estimate the total cost of your benefits. In the flat fee option, if your company grows after the contract was negotiated, the fees will remain the same until the contract period is up. This option also allows you to introduce performance penalties or bonuses. You can introduce provisions for a discount for the time when your broker doesn’t fulfil certain aspects of the agreement. On the other hand, to incentivize performance, you can introduce high reaching targets that if met, entitles your broker to more compensation.
• Con: However, if your company reduces in size or performance mid-plan year, you will be stuck paying the same rate regardless of if you no longer need the negotiated services. Depending on your broker’s philosophy, the flat-fee arrangement might not incentivize them to keep improving their performance. This puts more burden on you to make sure you find the right broker who is motivated by long-term partnership and customer loyalty, rather than a short-sighted financial gain.

Transparency is Key  

Which employee benefits broker compensation model should you choose? It depends on your specific company size and business needs. Regardless of which model you select; it is important your employee benefits advisor is completely transparent about the services they offer and how they are compensated. For instance, we have found that many brokers are limited in their offerings, yet they charge the same as those providing comprehensive services. Transparency allows you to assess your return on investment in your broker relationship.