Bryce Curtis isn't worried about the sustainability of his benefits brokerage. A partner at Williams Lloyd Employee Benefit Group in San Francisco since 2000, Curtis excels in the government contractor market. He has to - because it's all he does. Developing a niche within the employee benefits space is a smart business decision in this age of uncertainty following health care reform. And with well over 225,000 government contractors across the United States, it's a business opportunity open to pretty much anyone. Still don't think it applies to you? Don't be so sure. "In some cases [these contractors] are right under [a broker's] own nose. They are existing clients of theirs that they aren't performing these services for," says Adam Bonsky, EVP, government markets, for TPA Fringe Benefit Group. So who are these existing and potential clients? There are two types of government-funded contracting projects on both the state and federal levels that are available for private companies to bid on the work: construction-oriented (infrastructure such as bridges, schools, computer systems) and service-oriented (landscapers, security guards, food service). Construction work is generally subject to the Davis-Bacon Act of 1931. Additionally, 32 states have their own "mini" Davis-Bacon regulations, Bonsky points out. Meanwhile, most federal service work falls under the McNamara-O'Hara Service Contract Act of 1965.
Local government ordinances at the state level are known as living wage or responsible wage ordinances.
All of this is broadly referred to as prevailing wage work, which means anyone working on a tax payer-paid job must be paid a set wage. "That wage is there, from a lot of people's perspective, to balance the playing field," says Bonsky. "To make sure that the contractors, the employers bidding on these jobs are paying all of the employees fairly."
From there, the prevailing wage is broken up into two parts on a per-hour basis: base wage and fringe benefit amount. Using the example of a plumbing contractor who makes $30/hour in base wage and $10/hour in fringe, a unionized contractor would receive the fringe portion through his union in the form of benefits such as a pension trust, health trust, training programs and vacation time. The union would administer everything and make sure it is in compliance. "Where the opportunity exists," explains Bonsky, "is on the non-union contractors because they don't have a union to send the fringe to - they need help. They need somebody to support them in spending those fringe dollars."
As much as 84% of contractors in the United States are non-union, also known as open shop or merit shop, adds Bonsky.
How to do it
Data is available country-wide on who is bidding on government contracts and who is winning those jobs. Fringe Benefits will provide this information to its broker partners, as well as customized sales and marketing material. Bonsky says a lot of brokers "are afraid to [enter this market] because they don't want to look like they don't know what they're talking about."
To combat that, Fringe has a sales team that will sit in on sales calls with a producer and "help them lay out the problems, put the proposal together and close the business."
Other providers of contractor benefit programs include CBIZ, FCE Benefits, Davis-Bacon Pension Plans, Inc., Government Service Administrators and The Boon Group, to name a few.
As for those government contractor clients that may be under a broker's nose already, they need look no further than their own property and casualty division or a local P&C firm as a potential partner. When fringe dollars are put toward wage rather than benefits it greatly increases an employer's spend on workers' comp and general liability insurance, Bonsky explains, "so the P&C guys are always looking for ways to help their clients reduce their spend."
Although plans like The Contractors Plan from Fringe often include a retirement plan, no series 6 or 7 license is needed: producers "can sell the entire suite from soup to nuts: major medical, dental, vision, life and disability, HRA, retirement - all that you can bundle in and sell under your life and health license," says Bonsky.
Despite the benefits of such a plan, it is easy to see how employees might not take kindly to the immediate reduction in their take-home pay that results from the fringe portion being removed from it. But, thanks to health care reform requiring that employers provide health coverage or face a penalty (even if enforcement is delayed for an additional year) "the contractor can say, 'Hey look. I'm required by law now to provide these benefits. I'm sorry.' ... It takes some of the heat off of the employer," says Bonsky.
Jeanette Zakar, president of Contractor Benefits Solutions in Atlanta, has been working on a potential contractor client for the last four years. Just as she'd convinced him to switch to a benefit plan to be in compliance with reform, the ACA employer mandate delay became public and he said, "OK, I've got another year!" she says. "So there's those few and far between contractors that still cannot see the big picture and communicate it to their employees."
For some, it takes a triggering event outside the world of compliance. The real value in introducing a fringe benefit plan became clear for a client of Bonsky's a couple of years ago when that client saw one of his employees pull up to a job site in a Cadillac Escalade - the base model of which retails for more than $60,000. "It dawns on him: These employees don't know what to do with this money," Bonsky recalls. "They don't know how to spend it for their future properly. And he feels this overwhelming sense of accountability and need to do the right thing. To help his employees make better decisions. So at that point he changes his mind and decides to start putting the fringe toward the benefits."
While the employees were "a little mad, pissed off at first," now they have more than $60,000 saved up in retirement accounts. "It's a source of a lot of pride for him," says Bonsky.
Dick Salanger, owner of Salanger Trucking in Syracuse, N.Y., had a similar experience with his employees. He met his broker, Al Bentley, through a booth at a convention for his trade organization, National Star Route Mail Contractors Association. When employees were skeptical about losing the fringe money from their paycheck, Salanger ran some dummy payrolls to show the benefits of tax deductions versus no deductions and how that was affecting their take-home pay. When it came time to make the switch, Bentley did informational meetings for Salanger's 50 employees so that no one would be caught off guard. A couple of years later, "nobody's complaining today! They all have a great portfolio, great account," says Salanger. "I envy them to see the kind of money they have stashed away."
One of Curtis' clients, Cindy Pitts of F&P Construction in Reno, NV., saw the light when she realized she'd be able to save 10% on bids. "I am happy and proud that we are doing this for our employees," she says.
Having grown up in Portland, Ore., Curtis earned his bachelor's in economics at the University of Washington before getting involved in a couple of technology-based start-ups in Seattle. But in 2000 when a good friend of his was looking to expand his benefit brokerage Curtis jumped at the chance for something new and moved to San Francisco to partner with Darren Bottinelli at Williams Lloyd. "I just really liked the niche that he was in," says Curtis. "He had a real strong niche business that he was developing [in government contracting]. That's always something that I look for, something with a real focus and strong market definition."
That differentiation from the competition has helped Williams Lloyd to grow and succeed for more than a decade. In fact, Curtis was the top-performing producer for Fringe Benefits in 2012. "Our specialization allows us to have the upper hand in the sales process when we come up against a traditional benefit broker that has never worked in our market," says Curtis. "In fact, our specialization has allowed us to partner with other employee benefit brokers that might have a client or two working in the government sector. These brokers realize they are better off bringing in someone that is an expert in this niche to assure the proper plan design and on-going compliance support."
Curtis spends much of his day working on business development, which includes plenty of partnering with trade associations. He nurtures those relationships through in-person meetings that primarily take place in the western region of the U.S. "We're fortunate to have been in this business long enough to develop most of our new business through a combination of client referrals and trade associations that are familiar with our specialized expertise," he says.
Client support "involves quite a bit of front-end work" on enrollment meetings and day-to-day administrative support. "Much of this has been mitigated over time by connecting with the right third-party administrators who are able to provide the level of market knowledge and customer support we require," says Curtis.
As brokers face unprecedented changes, "they're looking for ways in this new future to specialize, differentiate and update or alter their value-add," says Bonsky, who through Fringe works with more than 600 brokers like Curtis nationwide. "And in our particular market niche there are phenomenal ways to do that."
In the insurance business for 45 years, Dick Asher sold his company in 2006 and started doing consulting work for the Baltimore Metro Chapter of the Associated Builders and Contractors, Inc. as an employee of ABC through ABC Group Insurance Marketing Associates of Maryland. It is the largest trade association in the country for non-union commercial contractors, with more than 1,600 members in Maryland.
Asher espouses the benefits of specializing in the government contracting niche: "I'm an insurance agent and I know an awful lot about the Davis-Bacon Act. And if I compete against you and you don't know what I'm talking about, you're going to lose. Because I'm going to be able to show that prospective contractor how they can save hundreds, thousands of dollars well beyond the 10% that I was able to get when I renegotiated their health insurance program."
Asher routinely addresses agencies on the benefits of working in the prevailing wage market. Many agencies are members of ABC and ask him to speak with their producers about how it works. Referring to the government contract-heavy Washington market in particular, "I can't for the life of me understand how any agent who is trying to compete on a contractor in the District of Columbia that doesn't understand the Davis-Bacon Act can even get past the front door," says Asher, who reports a sales close rate of nearly 95%. "This whole subject never comes up with a lot of brokers," he adds. "If I bring it up they've just become $3,000 more competitive," due to the fact that the prevailing wage employer is now paying taxes on a significantly smaller payroll burden.
According to Fringe's Bonsky, 65% of contractors are either providing cash in lieu of benefits or are providing benefits that are not ACA compliant. "The opportunity is huge for brokers," he says. Take a case where the fringe portion is $10 per hour. Over a full work month that is $1,600 to spend on benefits. If major medical insurance removes around $400, there is still $1,200 to spend on specialty benefits such as dental, vision, life, critical illness, even gap insurance, explains Bonsky. "We put in an HRA where it makes sense so they can save dollars year over year for their health spend," he says. "Then of course whatever's remaining we can flow into a retirement plan for their futures."
With all of the contractor's fringe money going to one place, their employees can go online and see where every dollar of that benefit goes, Bonsky says of Fringe's Government Contractor Plan. "The broker gets multiple lines of revenue, one place to manage it all, one place with all the compliance, one place with all the benefits administration," he adds.
On the construction side of federal government contracting, there is at least $300 billion spent every year on infrastructure - $80 billion on the service side. And this does not include local government work, Bonsky points out.
While the government contractor niche may seem limited to some, says Curtis, he says the stability of such consistent spending makes it a great market to be in. Private construction can be volatile and easily affected by the economy. By contrast, "the government market has remained relatively stable, including over the past 20 years," he says. "One of the advantages to the government market versus the private sector is the spending is much more stable, gross expenditures on state and federal budgets, than construction spending in the private market."
One of the main reasons Curtis gets excited about his job is how it enables him to help contractors become more competitive in the business process. "Many of the contractors we come in contact with have no idea what to do with these mandated fringe benefits and end up adding them to their employees' W-2 wages," he says. "This is fine from a compliance standpoint, but can end up being very expensive, as they are incurring payroll taxes and sometimes additional workers' compensation on the fringes. We are able to not only outline the traditional reasons that an employer should provide employee benefits, but also show them a great path to bottom-line savings by diverting this fringe portion off the employee's W-2 wages and into employee benefits."
A construction contractor can add anywhere from 25% to more than 50% to their payroll burden by paying the fringe through wages, according to Bonsky. Using the $30/hour base, $10 fringe example again, he explains how a small contractor with 25 workers doing 75% prevailing wage work would see about $100,000 a year in savings. "It's a giant amount of savings," he says.
For those not offering any type of health care to employees now, add the $2,000 per employee penalty from the ACA that is now set to go into effect in 2015 on top of that and "it makes no sense whatsoever" for a contractor to keep paying the fringe benefit amount on payroll, adds Bonsky.
In the market for 30 years, Laurinda Ferreira is a senior financial adviser with MetLife in Roslyn, N.Y. She works with all types of employers, but many of her clients are small business construction owners. "What I'm finding especially today is that people really don't have the time to manage their own finances or the money," says Ferreira, who gets most of her clients through referral. "So when they get the opportunity to do it through their employer it makes it so much easier."
She finds that as long as employees are educated on the advantages of a fringe benefit plan, "they really have no trouble signing up for it. ... If you get the employee and the employer to buy into it everybody's happy at the end of the day and they get to value their employment a lot more because of the benefits that are being provided."
At New England Drywall Co., Inc. in East Providence, R.I., Steve Benfeito's 18 employees have been on such a plan for a few years now. Not only are employees really appreciating the money in their previously non-existent retirement accounts, but "it's made me very competitive," he says, estimating his plan has saved him around $3/hour per employee. "The guys really have seen a huge difference. They have thousands upon thousands in their 401(k)s, where before they had nothing."
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