Benefits May 11, 2017

Employer Usage of HSAs More Prevalent, but Enrollment Could Be Boosted

Average HSA enrollment is 17% compared to a 24.6% prevalence rate, and the gap is more striking among large groups, UBA finds.
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Employers continue to seek health care cost savings through consumer-driven health plans (CDHPs) with health savings accounts (HSAs), and the less popular health reimbursement arrangements (HRAs), according to survey data from United Benefit Advisors (UBA).

In a new special report, UBA takes a deeper look into which aspects of these accounts are most successful, and least successful, broken down by industry, employer size, and region.

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Its research found 35.1% of all plans offer an HSA or HRA, which is up from 34% in 2015, a 3.2% increase. An HSA is offered in 24.6% of plans, a 21.8% increase from five years ago. HSA enrollment is at 17%, a 25.9% increase from 2015, and nearly a 140% increase from five years ago. The average employer contribution to an HSA is $474 for a single employee (down 3.5% from 2015 and 17.6% from five years ago) and $801 for a family (down 9.2% from last year and 13.7% from five years ago).

Generous HSA contributions, like those found in New England, among small employers (25 to 49 employees), and within the education industry certainly play a role in their impressive enrollment successes. However, North Central employers have achieved high enrollment with average contributions. Very large employers have made surprising gains in attracting employees to HSA plans (they lead with 19.1% enrollment on average) with below average contributions ($413 for singles).

The difference between HRAs and HSAs tends to lead to very different usage, finds UBA. HRAs can sometimes be complicated to implement if they do not have a simple structure that employers and employees can understand, which in some cases has led to a flatter growth rate. Generally, average prevalence and enrollment rates for HRAs both hover around 10%. Average HSA enrollment, however, is 17% compared to a 24.6% prevalence rate. The gap is more striking among large groups who, though they have the above average 19.1% enrollment rate, have a 41% prevalence rate, indicating an opportunity to improve employee interest in these plans.

“The best course of action is to increase employee education about the use of HSAs and the benefits of having one in addition to recommending that our employer groups partially fund the HSA as well to assist with their high deductible,” says Terriann Procida, UBA board member and founding partner, Innovative Benefit Planning, LLC, a UBA Partner Firm.

UBA’s report, “How Health Savings Accounts Measure Up,” may be downloaded from here.

Investing May 11, 2017

Fixed-Income Holdings Should Inform TDF Series Selection

Fixed-income investments play a crucial role in overall target-date fund performance, but a new report suggests plan sponsors spend far more time thinking about the equity side. 

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The fixed-income allocation is often the key differentiator among target-date strategies that appear similar in terms of equity holdings and the basic glide path strategy, according to a new analysis from J.P. Morgan Asset Management.

In a new retirement insights paper, “Three Questions for Assessing TDF’s Fixed-Income Allocation,” Dan Oldroyd, portfolio manager and head of target strategies, argues fixed-income investments play a crucial role in overall target-date fund performance. However, he commonly sees clients and industry professionals alike focusing much more on the equity holdings in TDF portfolios—perhaps based on the assumption that this part of the portfolio is always the greater source of risk and returns.

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This is simply not true when one keeps in mind the very long-term nature of TDF strategies, Oldroyd warns, especially when one remembers that any given TDF may start out mainly allocated to equities—but over time the fixed-income allocation takes the lead role. Especially for investors near the retirement date, the nature of a TDF series’ fixed-income holdings can make all the difference.

“The fixed income allocation can be a key differentiator among target-date strategies, but its structure and management do not always get the attention they deserve within the TDF selection process,” Oldroyd adds.  

He points out that preferred TDF strategies may vary quite widely across plan sponsors based on participant needs, and that when selecting the best TDF for their unique participants, plan sponsors should consider three things. First, is the fixed-income portfolio sufficiently diversified? Next, does the fixed-income manager have the flexibility to enhance risk-adjusted returns? And finally, can the TDF’s fixed-income portfolio help weather a rise in interest rates or other changes in the economic and investment environment?”

Oldroyd observes that most investors understand the basic idea that a well-diversified equity allocation may be able to deliver more consistent risk-adjusted returns across a wider range of investment environments than a more narrowly diversified, concentrated allocation. Yet fewer people seem to grasp that the selfsame factors apply to the fixed-income markets—that there are many different types of bonds holdings one can purchase, and many different ways to organize them in pursuit of the efficient investing frontier.

And just like on the equities side, the J.P. Morgan analysis goes on to argue that “skilled active fixed-income managers generally have greater flexibility and more tools than passive managers for generating strong risk-adjusted returns over time. Replicating a fixed-income index can be more complex, costly and subject to structural bias, and involve more active decisionmaking, than some investors realize.”

Concluding with some important context, Oldroyd suggests that interest rates are widely expected to climb higher during the rest of 2017. And so retirement plan investors “should ensure TDF strategies can adapt to such changes and represents a reasonable compromise between controlling costs and providing participants with the potential for a smooth path to a financially secure retirement.”

Additional research and information from J.P. Morgan Asset Management is available here.

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