Construction financial management operates on razor-thin margins, making every controllable cost critical — especially health care. As one of the largest non-wage expenses and the source of significant fiduciary liability, it’s important to understand how and why approximately 25% of what most companies spend on health care is being wasted.¹ This article provides a practical playbook for leaders to strengthen governance and align incentives so that they can reduce health care inflation, fiduciary exposure, and transform benefits into a competitive advantage.

Understanding the Landscape: How the Employee Benefits Industry Works

Modern employer coverage traces back to early prepayment models, which expanded rapidly as employers adopted health benefits as a part of total compensation.

Although employee benefits brokers play a crucial role in navigating health insurance plans, negotiating rates, and managing the enrollment process, the industry’s historical and current compensation models create financial conflicts of interest for employers.

The federal government classifies broker compensation as either direct or indirect, and since December 27, 2021, employers are required by federal law to fully understand who is paying their broker, why, and how much.²

Direct compensation primarily consists of commissions paid by insurance carriers to brokers. Brokers are often paid by the very entities with which are supposed to negotiate, which can skew outcomes and potentially conflict with their clients’ best interests. As premiums increase, so does the broker’s compensation, undermining a broker’s incentive to procure better options or negotiate with existing vendors.

While some brokers have shifted to fee-based models to avoid conflicts associated with commissions, indirect compensation paid to brokers continues to create significant fiduciary risk for employers.

Indirect compensation includes new business and retention bonuses, luxury vacations, volume incentives, loans and lines of credit, per-script fees from pharmacy benefit managers, and other market-derived income arrangements disclosed in quarterly reports by large brokerages.

Understanding these industry dynamics is not about assigning blame; it’s about empowering yourself with knowledge to make informed decisions.

The Financial Impact: Health Care Costs & Construction Profits

Health care costs are a rapidly growing financial risk for construction companies and often a top expense. The prevailing belief that these costs are unavoidable ignores a critical truth: roughly 25% of all U.S. health care spending is wasted.

For employers, this translates to an average overpayment of $4,000 per employee annually.³ For a 100-person company, that’s an annual $400,000 loss that could be reinvested back into the business.

Beyond direct financial losses, this inefficiency reduces competitiveness, stifles growth, impacts employee morale, increases fiduciary liability, and compromises employee health.

By failing to address this hidden waste, an opaque system can profit from your resources. The actual cost of the status quo is substantial, affecting both your bottom line and the wellbeing of your workforce.

Fiduciary Responsibility in Action: Best Practices

Fiduciary duty refers to the legal obligation to act in the best interests of another party. In the context of health care benefits management, this means acting in the best interests of plan participants: the employees.

Under the Employee Retirement Income Security Act of 1974 (ERISA) section 404, construction executives who oversee employee benefits are considered fiduciaries with specific responsibilities that include:

• Due diligence: Selecting and monitoring benefits providers carefully
• Transparency: Disclosing compensation arrangements and potential conflicts of interest
• Prudence: Making decisions that are reasonable and in the best interest of plan participants
• Loyalty: Acting solely in the interest of plan participants⁴

Understanding vendor contracts and compensation structures is crucial for fulfilling fiduciary responsibilities, and construction financial professionals should maintain records of how all decisions are made. Use standardized agendas, decision memos, requests for proposal scoring matrices, and meeting minutes to demonstrate transparency, prudence, and process.

This documentation can be invaluable in demonstrating fiduciary compliance and protecting against potential legal challenges.