Uncomfortable Silence: Why the New Benefits Disclosure Requirements Matter

By BeneRe
February 6, 2024

The Consolidated Appropriations Act of 2021 includes a provision that requires benefits brokers to disclose all compensation over $1,000 to employer clients. What does this mean for the industry?

Key Takeaways

  • The benefits industry has had a compensation transparency issue for a long time, especially for voluntary benefits
  • Lack of transparency misaligns brokers and their clients, impacting the whole industry
  • The government continues to try to address these problems with disclosure requirements, including the new Consolidated Appropriations Act provision

More and more corporate employers, benefits brokers, and consultants have started advocating for greater compensation transparency. The government has taken steps over the years to require certain disclosures, and the recent Consolidated Appropriations Act of 2021 (CAA) includes a provision that brokers must further disclose compensation and commissions to their employer clients. 

These guidelines come after years of hidden fees and lack of transparency in the benefits industry, which have created misalignments with negative consequences for everyone.

This post will discuss why a lack of transparency is detrimental to the insurance industry and walk through the CAA provision and its history.

Why is transparency so important?

There has too often been an uncomfortable silence in the benefits industry. This happens when a client asks their broker to explain all the different types of compensation structures there are, and the broker is silent, or not fully transparent with them.

This silence creates a serious alignment problem. If you’re driving a car that’s misaligned, the tires are wearing down faster, you’re experiencing a rough ride, and the wheel is pulling more to one side or the other. This creates serious long-term problems for the vehicle.

The same is true for the client-broker relationship. When everyone isn’t on the same page, it causes issues for the whole operation. The CAA of 2021 is trying to resolve some of that misalignment. For example, before clients ever look at insurance quotes, there are often pay-to-play fees extracted from the carriers, kind of like slotting fees at supermarkets. Those fees can be as much as seven figures for a single carrier, and they’re often called “panel fees” or “platform fees.” Extracting money from certain carriers crowds out a lot of competition, so you’re only seeing providers that have already added a layer of cost for employees. Now, they have to recoup that through pricing that goes to the employees. This is the first point of misalignment.

The second form of misalignment involves the incentive comp programs, often called heaped commission structures. These work so that brokers get heavy compensation in year one and lower compensation in subsequent years. This has caused brokers to create concepts like “consulting banks.” A consultant may be taking a huge amount of money in year one, but they give their clients a “bank account” to spend on services where the consultant controls the price for services. Often, the bank goes unspent, creating even higher margins. While “the bank” gives consultants cover for extracting high compensation from employee payroll-deducted dollars, the process contributes to lower claims ratios overall.

A similar situation happens with contingent income in the form of production credits or bonus compensation. Often the more volume a broker brings to a carrier, the higher the commission rate can be –it’s a strong motivator that tends to skew recommendations to the client.

This setup drives more and more business into a concentrated number of carriers because of the amount of compensation at stake. For insurance companies, this creates a powerful new business flywheel that its clients are rarely privy to.

The Consolidated Appropriations Act of 2021

The CAA of 2021 includes a provision that requires benefits brokers and consultants to disclose any direct or indirect compensation they receive related to servicing plans for their clients. The clients may then review the compensation structure to ensure it’s reasonable. This requirement is in effect as of December 27, 2021. Brokers must disclose compensation or commissions of more than $1,000 expected throughout the year.

With the CAA, brokers are now required to begin disclosing their varying sources of compensation in much greater detail. Some brokers still say compensation disclosure is important for the healthcare, disability, and life insurance spaces, but they argue that they don’t have to report on voluntary benefits because they are “non-ERISA.” In essence, 5500 disclosures of Voluntary Benefits compensation would represent the proverbial “nail that sticks up gets hammered down,” which explains why there is so little voluntary benefits reporting available.

Note that it’s not necessarily the individual brokers’ fault so much as how the industry has developed over the years. But this is why it’s so important that guidelines like CAA are put in place and followed — to drive greater transparency and improve the overall market.

The Plan Sponsor Bill of Rights from Health Rosetta provides a solid set of guidelines for every plan sponsor, so clients can gravitate to benefits brokers who are following transparency best practices. Full compensation disclosure will strengthen the benefits industry as a whole.

The BeneRe commitment

At BeneRe, we believe that transparency is key to a better industry. Every dollar associated with our plans is disclosed to the client and the broker, and all parties always know where each dollar is going. There is nowhere to hide with our plans.

These transparency initiatives will help to drive up claim ratios, so your employees get more for their insurance spending. Anything leftover at the end of the year is reinvested in the employee benefits plan in the form of a dividend. This practice negates contingent bonuses and redirects those funds for employee benefits reinvestment.

We’ve aligned our voluntary benefits program with the best interests of your employees, which correlates with the release of the CAA of 2021 and its applicable provisions. We believe strong client relationships are built on transparency. That’s one of the reasons why we introduced our unique business model back in 2018.

Reach out to BeneRe today for a complimentary financial analysis of in-force programs.