In today’s environment, employers struggle to contain the rising cost of health care but often overlook excessive or undisclosed broker or consultant fees. These fees contribute not only to increased health care costs but also to the risk of lawsuits. Under ERISA, plan fiduciaries have a responsibility to oversee plan fees and monitor vendors. As a result, employers, who pay unreasonable fees, may have increased risk of lawsuits.
Fiduciary responsibilities
Similar to retirement plans, increased scrutiny of health plan broker fees may create additional fiduciary risk and exposure to potential class-action lawsuits if the fees are paid by the health plan(s) and determined as unreasonable. Fiduciaries are required to assess the “reasonableness” of the fees paid by their health plan(s) to brokers and consultants.
The Consolidated Appropriations Act of 2021 (CAA) increased disclosure and transparency of both direct and indirect broker compensation providing a starting point to assess fees. It's important to note that these fees are typically shared between employers and employees.
A fiduciary's performance is not judged with 20/20 hindsight but rather fiduciaries are judged on the prudence of their process when making decisions. Fiduciaries must act solely in the interest of plan participants and beneficiaries and discharge their duties for the purpose of providing benefits or defraying reasonable expenses (avoiding excessive compensation). For a health plan, fiduciaries are required to:
- Select and monitor service providers, trustees, consultants, etc. and periodically review the decision to select or retain such service providers
- Monitor each vendor’s fees
- Attend fiduciary committee meetings and memorialize minutes
- Document any decisions impacting the plans
Managing fiduciary risk effectively centers on conducting thorough assessments of broker and consultant fee reasonableness. Organizations can mitigate fiduciary risk by implementing a comprehensive RFP process that includes detailed documentation of both the evaluation process and resulting decisions. This documentation becomes essential preparation should fiduciary performance be questioned or challenged, providing a clear trail of due diligence and rational decision-making that demonstrates adherence to fiduciary responsibilities and industry best practices.
Establishing fee ‘reasonableness’
Broker fees can vary significantly depending upon the specific services provided (plan design, vendor management, claims assistance, employee communications, etc.). As a result, monitoring fees can be difficult unless all current services are compared to the marketplace. Typically, total fee comparisons are performed during the request for proposal process.
A systematic approach to fee reasonableness is required that begins with substantiating costs through a competitive bidding process. This process brings much-needed transparency to broker and consultant fee arrangements, including commissions, rebates, and other compensation structures that may not be immediately apparent. Disclosed fees must encompass both direct compensation and indirect compensation, such as commissions.
Securing appropriate broker/consultant services starts with developing a custom and transparent RFP that addresses the diverse needs of all organizational stakeholders, including employees, HR departments, and finance teams. Given that industry consolidation has significantly transformed the marketplace landscape, fees, and return on investment expectations, it is crucial to ensure existing services and fees remain current with market offerings. A critical question to consider is whether an RFP has been conducted recently, as this timing can significantly impact service optimization and risk management effectiveness. Conducting an RFP for benefit broker and consulting services is crucial in determining the “reasonableness” of fees and managing fiduciary risk.
A model RFP process
The process of developing a transparent, comprehensive RFP begins with an assessment to determine the specific needs of both the organization and its employees. This involves conducting a thorough inventory of existing plans and. During this stage, it is essential to meet with both the fiduciary committee and selection committee to ensure all stakeholders are aligned on the RFP’s goals, objectives and requirements.
With foundational understanding in place, the next phase requires exploring current market trends and conducting benchmarking analysis against peer organizations. In addition, this process also involves identifying essential tasks and establishing critical deadlines to maintain project momentum.
Once the RFP is finalized, the focus shifts to collaborative RFP management. This stage centers on managing the overall timeline effectively while ensuring responsive communication with vendors who submit questions during the proposal period. Clear communication channels help maintain transparency and ensure all potential vendors have equal access to clarifying information.
The evaluation phase requires close collaboration with benefits stakeholders to identify critical organizational needs and develop comprehensive evaluation criteria. The selection committee must create detailed evaluation criteria and corresponding scorecards based on the identified needs, then systematically evaluate all submitted proposals and vendor presentations against these established standards.
The process concludes with facilitating the best and final offer negotiations while providing thorough documentation that justifies all decisions made throughout the selection process. This documentation includes comprehensive summaries of vendor proposals, detailed fee analyses, ratings comparisons, and other relevant materials that support the final recommendation and ensure transparency in the decision-making process.
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