Big Changes for Employee Benefits: The Agency Impact

Government regulation, litigation and judicial interpretation of the law continues to impact employers, their advisers and insurance carriers that serve the benefits marketplace. This regulatory landscape has also led to consolidation across the employee benefits vertical—making it increasingly difficult for smaller players to compete while rendering commission-based payment plans less and less popular.

Here’s what you need to know about the benefits landscape in order to better serve your clients heading into 2017.

Ripples from the ACA

The Affordable Care Act (ACA) enters its fourth open enrollment period this month. In the individual market, there’s no doubt that more people now have health care coverage under one of the ACA’s levels. However, the stated objective of the ACA is proving more elusive: creating more choice, competition and ultimately lower prices.

The five major health insurance carriers are now projecting steep losses on their ACA plans, resulting in withdrawal from the marketplace in some state exchanges and/or requests for significant rate action. For example, Aetna CEO Mark Bertolini indicated that due to losses, the company plans to reverse course in expanding into five new states. In light of UnitedHealth’s announcement that it will pull out of Oklahoma, this means that state will only have one exchange insurer.

Bertolini also indicated that Aetna forecasts $300 million in losses on their ACA business in 2016. But CIGNA, the smallest of the five major health insurance carriers, has indicated that despite experiencing a loss on their ACA business, it will continue to expand into additional markets.

If the overall response of the carriers is to withdraw from exchanges, what does this portend for the future of the ACA? In the Journal of the American Medical Association, President Obama responded to the concern of adequate insurance options and urged creation of a public plan “to compete alongside private insurers in areas of the country where competition is limited.”

Some cynics might argue that the ACA’s requirements make long-term profitability challenging­—despite minimum loss ratio requirements, which have reduced agent commissions—and that a public option was perhaps the long-term game plan from the start, but that President Obama couldn’t muster the congressional votes to achieve it. Regardless, one thing is clear: Perceptions of the ACA still vary widely from state to state.

New Fiduciary Rule

The biggest news for retirement came when the U.S. Department of Labor (DOL) released fiduciary regulations in April. The new regulations tighten conflict of interest rules under the Employee Retirement Income Security Act and are slated to begin taking effect early next year.

Under the new fiduciary rule, any person who provides guidance to clients about some retirement investments must adhere to a fiduciary standard of care. The rule primarily impacts IRAs, though it will also impact many 401(k) retirement plans. Moving forward, those who provide investment advice must either avoid compensation arrangements that create conflicts of interest or comply with the terms of an exemption the DOL issues.

Against this backdrop, litigation against retirement plan sponsors has become a near-weekly occurrence. In these cases, plaintiffs typically claim breach of fiduciary duties due to a lack of proactive oversight of 401(k) plan investment options. These suits tend to focus on underperforming investment options or above-average investment fees based on the size of the plan.

It’s a troubling new normal that means agents who are licensed as registered reps will soon face the fiduciary standard—rather than the current “suitability” standard—when they are not only providing investment assistance to a plan, but also facilitating “rollovers” from a 401(k) plan to an IRA.

Some suits claim that the DOL overstepped its authority with the broad scope of these new regulations. Whether the lawsuits will accomplish their objective remains to be seen. In the meantime, the regulations continue to cause ripple effects among broker/dealers, insurance companies and third-party administrators that share investment and distribution fees to subsidize administrative costs.

Beware the Disrupters

For many years, because of the expertise involved with guiding employers through their health insurance package needs, agencies were somewhat insulated from the disruption affecting other sectors of the economy. But now, in light of the big money driving health care—premiums, claims, commissions and more—it’s no surprise that technologically inclined entrepreneurs view delivery of health insurance as a space in need of an innovator’s touch.

Over the past two years, the company that made the most headlines was Zenefits. Parker Conrad founded Zenefits in 2013 after finding previous success with startup forays by leveraging technology efficiency in ventures such as PayPal and investing in Uber. Conrad’s vision was to combine several HR-related tasks—health insurance, payroll and other reporting—into a single offering. Many agents were concerned that providing free software in return for a broker of record letter was a rebate of sorts—and one that state insurance laws prohibited. Failing to apply and enforce those laws would create an uneven playing field.

At first, Zenefits enjoyed meteoric success, attracting large investment capital from such stalwarts as Fidelity. In fact, its capital rise of more than $500 million valued the company at $4.5 billion.

But as every insurance agency knows, it’s not so easy to disrupt this industry. Zenefits ran into headwinds regarding its business model relative to the rebate issue, particularly in Utah. The company’s explosive growth from a dozen employees to some 1,500 proved hard to manage—and it ultimately ran afoul of satisfying licensing requirements. After he authored a “macro” designed to skirt licensing regulations, Conrad was asked to step down from company leadership.

Despite the fall of Zenefits, it would be a mistake to dismiss the company’s disrupting premise: a one-stop shop for payroll, benefits and HR needs that provides a more streamlined approach for purchasing health insurance. Currently, the company claims to have fixed its non-compliance issues and revamped its management team, and cites more than 20,000 accounts while continuing to represent some of the largest health insurance carriers.

The lesson for independent agents? They need to continue to efficiently leverage technology to help their clients satisfy ACA requirements in a more user-friendly manner.

A Path Forward

The cost of health care continues to outpace wage increases, as well as the ability of employers to increase their revenues. Moving forward, interest in outsourcing some company functions will only grow. Independent agencies should consider what tasks they can take on while making sure their professional liability insurance covers them for those duties.

For example, if your agency claims capability to assist with COBRA administration, you should spell out in your agreement exactly what that entails—and also make sure your E&O policy covers those exposures. Similarly, if your agency serves as an ombudsman between a client and their third-party administrator, you should ensure each party acknowledges its responsibilities in writing.

For independent agents who operate in the benefits realm, the environment will only become increasingly challenging. Between staying abreast of the myriad laws and regulations pertaining to ACA, adhering to a heightened fiduciary exposure and addressing the looming threat of integrated service providers, agents must revisit how they provide their services, the level of compensation they require for those activities and which firms make good partners for providing efficient solutions to clients.

Dave Evans is a certified financial planner and an IA contributor.