Executive Summary: Broker Compensation and Fiduciary Duty: How the Money Works and Where the Law Is Moving

LFP-14.02 — The Broker’s Position

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Broker compensation in level funded placements operates across multiple layers. Base commissions typically range from $20 to $50 per employee per month, varying by carrier and product. Overrides of $3 to $8 PEPM reward volume concentration with a single TPA. Production bonuses of $5,000 to $10,000 trigger at placement thresholds. Retention bonuses incentivize renewal with the incumbent. Some brokers collect consulting fees on top of commissions rather than instead of them. In the deepest arrangements, the broker holds an equity interest in the recommended TPA, making the recommendation an investment decision rather than an independent advisory one.

Since December 27, 2021, Section 202 of the Consolidated Appropriations Act has required brokers to disclose all direct and indirect compensation exceeding $1,000. Failure to provide the disclosure converts the service arrangement into a prohibited transaction subject to excise taxes of 5 percent of the amount involved, rising to 100 percent if not corrected within 90 days. The fiduciary question turns on whether the broker exercises discretionary authority over plan management. A broker who recommends a specific plan, evaluates TPA quality, designs the plan structure, and manages the ongoing relationship is performing functions that meet ERISA Section 3(21)’s definition of discretionary authority, regardless of what the broker agreement disclaims.

The litigation trajectory has sharpened this question. In late 2025, Schlichter Bogard LLC filed class action lawsuits against major employers and their brokers, including Mercer, Lockton, Gallagher, and Willis Towers Watson, alleging fiduciary breaches related to compensation that prioritized broker revenue over participant interests. Encore Fiduciary’s analysis found that 155 fiduciary class lawsuits were filed in 2025, with 35 (22 percent) involving health plans. The legal theories apply with equal force to any ERISA plan arrangement where the broker exercises discretion and receives compensation from the product vendors whose products the broker recommends.

Disclosure does not resolve the conflict. The owner of a 20-person company who receives a Section 202 disclosure has received data but not the analytical capacity to evaluate whether the compensation structure influenced the recommendation. The employer can see the numbers. The employer cannot assess the counterfactual. The brokers who restructure compensation proactively, eliminating or disclosing overrides and providing fee-based advisory, are positioning for where enforcement and litigation are heading.