Investing June 14, 2018

Fidelity Finds Little Knowledge About HSAs

Many people are unaware of their triple tax advantages, that balances can be carried forward and that the money can be invested.

Reported by

Fidelity’s health savings account (HSA) business is seeing double-digit growth, with assets in these accounts now topping $3 billion—a 50% increase from 2017. Fidelity now serves 837,800 HSA account holders, and last year it added 117 new employers that provide HSAs to their employees.

Fidelity says that 25% of employees with access to an HSA are using one. When employers offer only an HSA-eligible health plan, 46% of workers add this savings benefit. However, Fidelity’s research also finds that, despite growth in HSA openings, many individuals are not making the most of the benefits these accounts can offer.

“With more than half of Americans naming rising health care costs as a top financial concern, this increased adoption of HSAs shows an encouraging trend that more people are making health care savings a priority,” says Eric Dowley, senior vice president, HSA product management, in the Fidelity Health Care Group. “But we still see a need for more education around how people estimate and plan for potential health care costs, both in the short and long term, and how an HSA can be a valuable tool in addressing these expenses.”

Fidelity notes that HSAs are available only to people in a high-deductible health plan (HDHP). The HSA balance can be carried over from year to year, and the account offers a triple tax advantage: contributions are tax free, balances can be invested and earnings grow tax free, and if the money is used for qualified medical costs, savings can be withdrawn tax free. However, at age 65, HSA account holders can use the money for things other than medical expenses, but they will be taxed on the withdrawals.

Fidelity notes that the contribution limits for 2018 are $3,450 for individuals, $6,900 for a family, and $1,000 in catch-up contributions for those over age 55. However, last year, individuals contributed an average of $1,800 and family account owners, $3,800.

Nearly 40% of people are unaware that the money in an HSA can carry forward. Instead, they think if they don’t use it, they will lose it at the end of the year. Additionally, 46% of HSA account holders are unaware they can invest their contribution, and a mere 7.7% actually do invest the money.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Fidelity’s research has also found that people who save in both an HSA and a defined contribution (DC) plan save an average of 10.% of their paychecks, compared with a savings rate of 7.7% for those who save only in a DC plan. HSA savers also have an average of $119,000 more in retirement savings.

Investing June 14, 2018

TDFs Have Helped Close the Investment Return Gap

“[When] investors commit to consistent investment regimes, investor returns are strong and the gaps are often positive," Morningstar says.

Reported by

Because of poor timing in purchasing and redeeming funds, investors tend to earn less than what the fund returns, Morningstar notes in a white paper “Mind the Gap 2018.”

“Investors large and small tend to sell after downturns only to buy back after a rally,” the research firm says. “But remaining invested in target-date funds [TDFs] and benevolent market conditions have narrowed that gap.”

For instance, the typical investor in diversified domestic equity funds earned an 8.32% annualized return for the 10 years ended March 31. By comparison, the average diversified domestic equity delivered an average 8.93% return, making for a shortfall of 0.61 percentage points.

Balanced funds, which include TDFs, saw a positive gap of 0.30 percentage points, with the average investors enjoying a 5.93% annualized return. The gap for municipal bond funds shrank slightly to a 1.26-percentage point annualized shortfall based on investor returns of 2.23%.

In other classes, the gap worsened. The gap between international equity funds grew to 105 basis points (bps), with total investor returns of 2.95%. The gap in taxable bond funds grew to 87 basis points with an annualized investor return of 3.01%.

Alternatives show the worst investor returns but the best investor-returns gap. The investor return is a dismal 9 basis points for the 10 years, but the gap is a positive 140 basis points.

Get more!  Sign up for PLANSPONSOR newsletters.

In the aggregate, the average investor trailed the average fund by 26 basis points annualized over the past 10 years; the investor return for the period was 5.53% a year compared to 5.79% for the average fund.

The five-year investor return gap figures are significantly better than the 10-year numbers, with one notable exception: Alternative funds saw their gap flip into negative territory with a 46-basis-point gap on investor returns of 1.21% a year.

“Target-date funds have proved remarkably consistent at producing good results for investors,” Morningstar says. “[When] investors commit to consistent investment regimes, investor returns are strong and the gaps are often positive. We think that the tremendous diversification of target-date funds, combined with the steady investment of 401(k) plans, shows the fund industry at its best.”

The “Mind the Gap 2018” white paper can be downloaded here.

«

Please turn off ad blocker to view.