Voluntary benefits litigation spotlights disclosure

• Key insight: Learn why voluntary benefits lawsuits force scrutiny of broker compensation and selection processes.
• Expert quote: Julie Selesnick - Brokers can face ERISA liability if found engaging in self‑dealing.
• Supporting data: 155 near‑record class actions last year; 39 of them involved health plans.
  Source: Bullets generated by AI with editorial review

Schlichter Bogard LLC earned a reputation 20 years ago for filing class-action ERISA litigation on behalf of plaintiffs alleging overpayments on 401(k) plan fees. Now, the St. Louis, Mo., law firm is pursuing aggressive action on the health and welfare side, filing four complaints against employers in two different U.S. district courts alleging overpayments on voluntary benefits premiums not subsidized by employers. 

Those lawsuits — filed just before Christmas — named several leading benefits consulting firms as defendants as well: Gallagher Benefit Services Inc., Mercer Health and Benefits Administration LLC, Lockton Companies LLC and Willis Towers Watson US LLC, claiming they engaged in self-dealing that harmed plan enrollees. 

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While employers have a lot to worry about with these cases, it's less clear if brokers face any liability under ERISA. "If brokers are found to have engaged in self-dealing or prohibited transactions, then they do not need to be fiduciaries to face ERISA liability," according to Julie Selesnick, executive director, legal and compliance with the Judi Group, founder of Health Plan Legal Counsel and senior counsel for Berger Montague. 

Of 155 near-record class actions filed last year alleging fiduciary breaches, Encore Fiduciary found that 39 were against health plans. Few of the more than 600 excessive-fee lawsuits filed against ERISA plans over the past decade have made it to trial.

Reasonable vs. excessive fees

These lawsuits argue that brokers were overpaid, and therefore, cost the ERISA plans more than they should have paid for the services provided, explains Jay Kirschbaum, benefits compliance director at World Insurance Associates. Another issue that arose is that the payment to brokers was a prohibited transaction using plan assets. 

"Full transparency would clearly obviate that line of reasoning," he says, noting that brokers who sell voluntary benefits likely are not as accustomed to ERISA plan methodology. 

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Treating voluntary plans as ERISA benefits comes with additional administrative requirements such as Form 5500 and plan documents. However, Kirschbaum says that since employers are already complying with those requirements for their underlying plans, wrapping voluntary benefits into that process should have relatively marginal obligations. 

"That provides a layer of administrative review that is baked into the process," he says. "It also provides a layer of protection for the employer for the voluntary benefits." 

The complaints suggest that the loss ratios could be under 50%, Selesnick says.  

"I don't think there's a rule that says you can't structure your compensation in some way where it's higher one year and goes down over five years," she observes. "But when you do that year one, you're giving yourself maybe 65% or 70% commission. That's when everybody joins. So, you're taking 75% of every dollar the year you sign up everyone on the plan. That does seem a little predatory." 

Concerns have been raised regarding steep commission rates that appear to exceed the genuine value of the benefits offered, prompting doubts about their fairness and justification, notes Charlotte Santa Cruz, founder of the Santa Cruz Insurance Group, LLC, a Foundation Risk Partners Company. 

A key consideration is whether commissions and incentives linked to health plans are influencing recommendations based on personal gains instead of prioritizing best practices for employee benefits.

"In our three decades of experience, we've never received complaints about commissions or cost of a product the employee chose to buy," she reports. "Instead, we've been met with gratitude from clients who appreciated the opportunity to secure these plans, ensuring their financial stability in times of need."

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A reckoning on compensation

For years, voluntary or enhanced benefits were treated as the safest part of the benefits package with minimal risk, explains Eric Silverman, founder of Voluntary Disruption. He says ERISA lawsuits involving accident, critical illness, cancer and hospital indemnity plans have forced a closer look at how these benefits are selected, priced, monitored and communicated. And the key takeaway is that process matters, even when benefits are not employer-funded.

These lawsuits open up a much broader conversation than voluntary benefits alone, observes Justin Leader, president and CEO of BenefitsDNA. "At their core," he says, "they force employers and advisers to reconcile compensation with scope of services and answer a question ERISA has always asked but the market often avoided: is the compensation reasonable for what is actually being delivered?"

This is where ERISA Section 408(b)(2) becomes central. Disclosure is not just about stating what was paid, he explains. It is about whether fiduciaries understood the full picture of direct and indirect compensation, evaluated it against services provided and documented that analysis. "These cases highlight how often that step was skipped, particularly in areas historically viewed as adjacent to the health plan," he adds.