Understand Employee Benefits Broker Fees to Control Your Benefits Costs
Posted in: Employee Benefits
Are you frustrated by increasing employee benefits costs? If so, you might want to start paying closer attention to what you are paying for in your benefits plan. Of course, rates can increase for many reasons, but it is important to understand how your employee benefits broker is compensated due to the financial impact it can have on your benefits plan. Specifically, if you know you could be paying two different rates for the same benefits, wouldn’t you want to pay less for insurance broker fees?
What Are Your Employee Benefits Broker Compensation Options?
If you are wondering whether you are getting your money’s worth, you need to understand the different broker compensation models when selecting a benefits plan agreement. The three main compensation models you may come across are:
Percentage Based Commission Model
- Pros: 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. However, if you feel inclined to be more involved, this percentage can also be negotiated with your broker.
- Cons: The incentives for the broker and the client are misaligned in this model. For example, let’s say your current agreement has 5% commission built in this year, but suddenly it increases to 20% at your next renewal, which could be arbitrary or perhaps warranted. In this case, the burden is on you to evaluate the services the broker is providing in order to determine if they have earned their new pay raise.
Per Employee Per Month (PEPM) Commission Model
- Pro: In the PEPM commission arrangement, you are only responsible for paying for those employees who are on your benefits plan each 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
- Pros: 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.
- Cons: 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. Also, depending on your brokers company’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.