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Web-based benefit brokers shake up model

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Deep-pocketed startups in the benefits business are grabbing headlines, winning customers and making old school brokers sweat, but they're also igniting change in the way traditional brokers operate.

Since 2013, San Francisco-based human resources and benefits startup Zenefits Inc. has garnered attention for its unorthodox business model of giving away its human resources platform for free in exchange for handling its small-business customers' benefits.

The firm, which makes money from commissions paid by insurers, now is expanding its services with a free Patient Protection and Affordable Care Act compliance tool announced Sept. 21.

Meanwhile ZenPayroll Inc., a 4-year-old payroll administrator also based in San Francisco and pegged by media outlets as Zenefits' new competitor, on Sept. 17 rebranded as Gusto Insurance Services L.L.C. and said it will sell benefits to small businesses in California with plans to expand to other states.

It already has a leg up with “tens of thousands” of payroll customers nationwide, a company spokes-woman said.

While established benefits brokers argue these startups sacrifice “high-touch” advisory services in favor of a low-touch, high-tech experience, there's some disagreement.

“We have only been recruiting brokers who have years to decades of experience providing health benefits and benefits counsel to small-business owners,” said Lauren Fifield, Gusto's San Francisco-based head of health benefits operations. “I think there are some things technology can do really well ... but I think you can't ever really use technology to replace expertise.”

On its website, Zenefits touts its eight- and 12-year “veteran” brokers alongside its “innovative technology.” It did not respond to requests for an interview.

With or without expertise, technology may be enough lure clients.

“There are efficiency trade-offs that buyers are willing to make,” said Noel Obourn, a Hartford, Connecticut-based principal and director of emerging markets at Buck Consultants at Xerox. In addition, she said, small businesses have been underserved by traditional brokers.

“Were they to scale up (to reach midsize and larger firms), I definitely think they would land themselves in the competitive space of traditional brokers and consultants, as well as traditional payroll and benefits administration giants,” Ms. Obourn said of Zenefits and Gusto.

Zenefits is already stealing small-employer clients from bigger brokers.

Brokers for Hub International Ltd., Digital Benefit Advisors and Wells Fargo Insurance Services USA Inc. all said they've lost customers to Zenefits. At the same time, many of the departed clients have since returned unsatisfied, some brokers said.

Nevertheless, “It's a threat to all of us,” said David Martin, Madison, Wisconsin-based managing principal at Digital Benefit Advisors. It's “very much of a disruption to what our model is built off of, which is the advisory services (as the primary business offering) and the technology, second,” he said.

“There's a lot of private equity money that's coming into the employee benefits space, and a lot of it is being earmarked for technology,” said Tim Prichard, Houston-based executive vice president and head of national employee benefits practice at Wells Fargo. “Companies that have unique ideas and a lot of capital are drawing attention of not only clients but also investors as well.”

Mike Barone, San Diego-based president of employee benefits at Hub, said Hub and Zenefits have swapped clients, but he's not losing sleep over it.

“Most brokerage organizations have renewal rates in the 90% plus range. That's certainly true for Hub and is true for most brokers, but ... Zenefits has been somewhat successful on smaller organizations,” Mr. Barone said.

Zenefits has experienced growing pains, however. It's currently battling a lawsuit brought in June by payroll giant ADP L.L.C. accusing Zenefits of defamation. The dispute began after ADP blocked Zenefits' access to its payroll data, claiming Zenefits was accessing the information without permission. Zenefits then criticized ADP publicly.

The startup was also banned in Utah last year for violating state rebate laws, but the ban has since been lifted.

Perhaps more important than the threat of losing customers is the move toward advanced technology that Zenefits, Gusto and several other benefits and human resource software companies are spurring.

“From an industry perspective, this is an evolutionary step in that we're going to be making heavy usage of technology to streamline processes that have historically been paper-based, labor-intensive, inefficient and costly,” Mr. Barone said.

Brokers acting as “product-centric intermediaries” must become more “service-oriented” if they want to stay in business, said Jim O'Connor, Manasquan, New Jersey-based president of employee benefits at CBIZ Inc.

And most brokers are doing just that, he said. They're building their own technology or partnering with the countless software companies such as Liazon Corp., bswift L.L.C. and Maxwell Health that have entered the insurance space selling products ranging from wellness programs to private exchange software.

To Randy Abbott, Boston-based senior consultant at Towers Watson & Co., it's not so much the startups that are threatening existing brokers, but the changing mindset coming with a younger, consumer-minded generation of buyers.

“People want to do things just like they do on Amazon,” he said, and Zenefits and other new benefits brokers are just alternative solutions.

Though it's “way too early to sound the death knell for brokers,” Mr. Abbott said, “traditional brokers (will) adopt some of the new technologies to meet the needs of their customers, and I think we'll increasingly find that some that relied extensively on the technology will find the need to provide more personalized decision support.”