As plan sponsor, it is part of your fiduciary duty to select the most advantageous broker for your employee benefits. While you are likely familiar with just how involved – and sometimes cumbersome – the process of vetting and selecting a broker can be, the actual appointment of the broker is much simpler. The execution of a broker of record letter is all it takes to establish the relationship between you and the broker, and its simplicity grants you total flexibility, as you can use the letter to select a different broker who will better serve the needs of your plan at any time, for any reason.
In addition to the broker of record letter, your broker may request that you sign a contract as part of the new appointment. Because the broker of record letter is the sole means by which to establish your relationship with the broker, the added agreement (or “broker contract”) may be completely unnecessary. More than merely superfluous, though, a broker contract could be the broker’s attempt at locking him or herself into the position for a defined term – a concept that is wholly at odds with the flexibility of the broker of record letter.
Before you sign, consider this:
- Does the contract discuss ancillary services that the broker will provide, such as assistance with benefits compliance issues and annual reports? Unnecessary broker contracts may be disguised as service agreements, particularly where no fee is charged for the services.
- Does the contract include a fee arrangement? Traditionally, brokers are compensated through commission, but compensation could alternatively take the form of a fee arrangement whereby you pay the broker directly for his services according to the terms spelled out in the contract.
- What is the term of the agreement, and how may the contract be terminated? A term beyond month-to-month or a termination provision that does not allow voluntary termination are extremely limiting and defeat the non-binding nature of a broker of record letter.
If the contract clearly introduces additional duties and benefits for both you and the broker, such as a fee arrangement or the payment for services beyond the scope of the broker’s duties, the agreement is likely a necessary component. Conversely, a contract that essentially does nothing more than iterate your appointment of the broker may be an illusive ploy to circumvent the flexibility of the broker of record letter. Don’t be deceived. Be confident that a broker contract will enhance your relationship with your broker rather than hinder it.
As always, seek legal counsel before signing an agreement, and if such an agreement is already in place, consult your attorney before taking any contradictory action.