Brokers Are Getting Some Unwanted Attention For All The Right Reasons
June 16, 2016
Benefit brokers are familiar with managing the “do we really need you” attitude of their clients. They devote a lot of time and energy proving they bring value to their clients that they could not get without them. And many of them do. They help clients choose insurance, retirement savings and other risk management products. Some are able to do this and save the client money even after factoring in their own fee…
Still many people begrudge brokers for receiving the type and amount of compensation they receive. They agree to the fee because it seems like such a small part of a much bigger transaction and they understand that that’s the way these transactions are done. However, thoughts about what brokers do and how well they do it to earn their commission linger.
These persistent thoughts about broker compensation came to the surface first with the health care reform law, then with retirement plan transparency regulation and later with the fiduciary rule.
Out In The Open At Last
With health care reform, brokers didn’t wait to be noticed. They moved from the middle to the front to express their concerns about navigators assuming their role, health insurance companies eliminating their commissions and regulators ignoring their existence. They felt disrespected and expressed their resentment in both negative and positive ways. Some brokers left the industry; others narrowed their focus and a few created profitable and disruptive niches that got a lot of attention. Too much attention… That was the case with Zenefits.
Zenefits is a technology company that provides software companies use to manage Human Resource administrative functions like benefit plan enrollments and changes, time and attendance tracking and ACA compliance. Zenefits is also a health insurance broker. In 2015, Zenefits, the brokerage, ran into regulatory trouble when it was revealed that it allowed unlicensed brokers to sell health insurance policies. It’s CEO and 250 employees were fired in early 2016. This week Zenefits is getting some more unwanted attention—it’s firing 106 more employees and encouraging others to leave and accept a severance package.
While the Zenefits health insurance broker story is interesting, it can’t compare to the drama happening in the retirement services sphere.
Retirement Plan Fees and Investment Performance In the Spotlight
For retirement brokers it all started with the 2012 Department of Labor’s (DOL)) fee transparency regulations-Section 408(b)(2). Basically, the regulations require retirement plan service providers to disclose, in writing, the services they perform and the direct and indirect compensation they receive. Before these regulations, retirement plan sponsors had no idea what fees they paid to their service providers. Unfortunately, these regulations were broad. The DOL gave brokers and other retirement services providers, great leeway in disclosing the timing of their indirect compensation. They also allowed them to provide compensation information in ranges instead of exact amounts.
Still, for the first time ever, brokers had to disclose what they were doing and the amount of compensation they received for doing it. Not too surprisingly, this new fee information was not received well by everyone. Participants who thought they were getting a raw deal on retirement plan fees, started filing lawsuits.
Fee litigation brought the second wave of holding retirement plan brokers’ feet to the fire. Brokerage companies including Great-West Life & Annuity Insurance Company, D.L. Davis & Company, MassMutual, Prudential Retirement Insurance and Annuity Co., ING Life Insurance and Annuity Co. and others all faced possible or actual litigation for their fees. Some of these firms paid millions of dollars to settle these claims.
If fee transparency and excessive fee litigation did not get the attention of the retirement broker community, the DOL’s new fiduciary rule did. The gist of this rule is that brokers can no longer sell investors the unsuitable investments. The rule is a continuation of the DOL’s efforts to eliminate the impact of excessive fees and poor performing investments on retirement saving balances. Brokers reacted negatively to the new fiduciary rule going so far as to file a suit against the DOL claiming it overstepped its authority in passing the rule. Ironically, many conservatives in Congress, including Speaker of the House, Paul Ryan, oppose the fiduciary rule.
But not everyone does…
Fortunately, more people listen when John Oliver, host of Last Week Tonight, speaks than when Speaker Ryan does. On his latest show, Mr. Oliver spent over 20 minutes discussing how brokers and other retirement service providers fleece Americans by charging high fees for doing next to nothing. It was a stinging indictment of the financial services industry and brokers played out on a national stage. Mr. Oliver was able to relay his company’s experience setting up a 401(k) plan working with a retirement service provider and the broker they hired to help with the set up. The broker had the potential of making one million dollars in compensation over a 30-year period for setting up the company’s 401(k) plan and providing financial advice. The broker compensation, along with the other fees for the plan was enough for the company to seek another firm to manage their plan. I’m sure that that is not the kind of attention retirement brokers want, but it is the kind of information we need to know.
Still many people begrudge brokers for receiving the type and amount of compensation they receive. They agree to the fee because it seems like such a small part of a much bigger transaction and they understand that that’s the way these transactions are done. However, thoughts about what brokers do and how well they do it to earn their commission linger.
These persistent thoughts about broker compensation came to the surface first with the health care reform law, then with retirement plan transparency regulation and later with the fiduciary rule.
Out In The Open At Last
With health care reform, brokers didn’t wait to be noticed. They moved from the middle to the front to express their concerns about navigators assuming their role, health insurance companies eliminating their commissions and regulators ignoring their existence. They felt disrespected and expressed their resentment in both negative and positive ways. Some brokers left the industry; others narrowed their focus and a few created profitable and disruptive niches that got a lot of attention. Too much attention… That was the case with Zenefits.
Zenefits is a technology company that provides software companies use to manage Human Resource administrative functions like benefit plan enrollments and changes, time and attendance tracking and ACA compliance. Zenefits is also a health insurance broker. In 2015, Zenefits, the brokerage, ran into regulatory trouble when it was revealed that it allowed unlicensed brokers to sell health insurance policies. It’s CEO and 250 employees were fired in early 2016. This week Zenefits is getting some more unwanted attention—it’s firing 106 more employees and encouraging others to leave and accept a severance package.
While the Zenefits health insurance broker story is interesting, it can’t compare to the drama happening in the retirement services sphere.
Retirement Plan Fees and Investment Performance In the Spotlight
For retirement brokers it all started with the 2012 Department of Labor’s (DOL)) fee transparency regulations-Section 408(b)(2). Basically, the regulations require retirement plan service providers to disclose, in writing, the services they perform and the direct and indirect compensation they receive. Before these regulations, retirement plan sponsors had no idea what fees they paid to their service providers. Unfortunately, these regulations were broad. The DOL gave brokers and other retirement services providers, great leeway in disclosing the timing of their indirect compensation. They also allowed them to provide compensation information in ranges instead of exact amounts.
Still, for the first time ever, brokers had to disclose what they were doing and the amount of compensation they received for doing it. Not too surprisingly, this new fee information was not received well by everyone. Participants who thought they were getting a raw deal on retirement plan fees, started filing lawsuits.
Fee litigation brought the second wave of holding retirement plan brokers’ feet to the fire. Brokerage companies including Great-West Life & Annuity Insurance Company, D.L. Davis & Company, MassMutual, Prudential Retirement Insurance and Annuity Co., ING Life Insurance and Annuity Co. and others all faced possible or actual litigation for their fees. Some of these firms paid millions of dollars to settle these claims.
If fee transparency and excessive fee litigation did not get the attention of the retirement broker community, the DOL’s new fiduciary rule did. The gist of this rule is that brokers can no longer sell investors the unsuitable investments. The rule is a continuation of the DOL’s efforts to eliminate the impact of excessive fees and poor performing investments on retirement saving balances. Brokers reacted negatively to the new fiduciary rule going so far as to file a suit against the DOL claiming it overstepped its authority in passing the rule. Ironically, many conservatives in Congress, including Speaker of the House, Paul Ryan, oppose the fiduciary rule.
But not everyone does…
Fortunately, more people listen when John Oliver, host of Last Week Tonight, speaks than when Speaker Ryan does. On his latest show, Mr. Oliver spent over 20 minutes discussing how brokers and other retirement service providers fleece Americans by charging high fees for doing next to nothing. It was a stinging indictment of the financial services industry and brokers played out on a national stage. Mr. Oliver was able to relay his company’s experience setting up a 401(k) plan working with a retirement service provider and the broker they hired to help with the set up. The broker had the potential of making one million dollars in compensation over a 30-year period for setting up the company’s 401(k) plan and providing financial advice. The broker compensation, along with the other fees for the plan was enough for the company to seek another firm to manage their plan. I’m sure that that is not the kind of attention retirement brokers want, but it is the kind of information we need to know.
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Denise Perkins
