Benefits November 16, 2015

HSAs Can Be Like DC Plans for Retirement Health Costs

Health savings accounts can be used much like defined contribution plans to save for retirement, and the key to growth is investing them.
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As the increase in health care costs continues to the surpass the rate of inflation, the use of health savings accounts (HSAs) has increased with the adoption of consumer-directed health care plans by employers.

Alongside this trend, the retirement industry is starting to tout the additional benefits of HSAs as retirement planning tools.

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“Most of Americans are unprepared for health care costs in retirement, and an HSA is the best way to save for that,” said Eric Roberts, a consultant at Nyhart Actuary & Employee Benefits, during a webcast hosted by the Healthcare Trends Institute. He noted that HSAs offer triple tax benefits, and at age 65, Medicare premiums and Medigap coverage are added to the eligible expense list for HSAs.

In addition, at age 65, the 20% distribution penalty for non-medical distributions no longer applies, so those distributions are taxed regularly. Required minimum distributions (RMDs) are not required from HSAs, and HSAs are not taken into account for Social Security means testing.

According to Roberts, many employees mistakenly believe HSAs are like flexible-spending accounts (FSAs); with FSAs, if they don’t use their funds by the end of the year, they will lose them. But, he said employers need to help employees develop a new mindset; they can put more into the HSA each year than they will need and the investment will grow, just like in their defined contribution retirement plan.

NEXT: Allocating savings dollars to HSAs

Roberts even suggests employees move some of their savings dollars from their DC plan to an HSA, as long as they still get the maximum employer match contribution from their retirement plan. For example, if an employee’s DC plan matches up to 6% of his or her deferrals, and that employee is contributing 10% to the retirement plan, he or she could take 4% of the DC plan contributions and put them into an HSA instead.

And this is not exactly a wash, Roberts explains, because HSA distributions for medical expenses are tax-free, and if the employee had to take a distribution from the DC plan, the distribution would have to be enough to also cover taxes.

President of HSA Consulting Services Todd Berkley told webcast attendees that employers can even default employees into contributing to an HSA, with the opportunity to opt out, and the Department of Labor (DOL) says that is ok to do without the HSA becoming an Employee Retirement Income Security Act (ERISA) plan.

Of course, the key to growing HSA savings is to invest the money.   

NEXT: Investing HSA savings

Berkley said the investment component of HSAs is “a hidden gem.”  Not all HSAs offer investments, but investments have been widely available and underutilized. He cited research that found after two years in HSAs, only 1.4% are investing, but after five years, 5.6% are investing, and by year eight, 10.5% are.

Focused education will help, Berkley said, and several HSA trustees as well as financial advisers have begun to highlight this capability to employees.

“Investing HSA assets is no different from investing DC plan assets,” Roberts added. “Employees just need to be made aware they can invest them.”

According to Berkley, some plans offer an HSA investment menu that is a modified version of the DC plan investment menu, and some HSA trustees offer open architecture with no restrictions on what investments can be used. He said an employer can offer the same investment menu as the DC plan; as long as the participant can decide whether to invest as well as how, the HSA is not an ERISA plan.

However, Roberts noted that any time employers make decisions about what investments to offer, they should be thinking about the best interest of participants, using the same fiduciary decision-making process as for the DC plan.

“I think we will see more employees viewing HSAs as a way to set aside dollars for retirement, and we need to educate along those lines,” Roberts concluded.

Compliance November 16, 2015

State Street’s Handling of GM Stock for 401(k) Gets Court Blessing

An appellate court found State Street’s process to review the GM stock investment was prudent.
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After much back and forth, an appellate court has finally dismissed a lawsuit against State Street Bank and Trust Company over its handling of the employee stock ownership portion of General Motors (GM) 401(k) plan.

Recognizing that it cannot rely on a presumption of prudence following the Supreme Court’s decision in Fifth Third Bank v. Dudenhoeffer, the 6th U.S. Circuit Court of Appeals said it evaluated State Street’s actions according to a prudent-process standard. The court interpreted the Dudenhoeffer decision to mean, and it held, that a plaintiff claiming that an employee stock ownership plan’s (ESOP’s) investment in a publicly traded security was imprudent must show special circumstances to survive a motion to dismiss. 

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Using the rule of Modern Portfolio Theory (MPT), the court found that plaintiffs Raymond M. Pfeil and Michael Kammer failed to show a special circumstance such that State Street should not have relied on market pricing. The plaintiffs argued that there were four dates at which it would have been prudent for State Street to divest the plan from GM company stock.

However, the court found that the plaintiffs did not offer legal reason why the four events suffice to trigger a particular reevaluation process, but instead rely on the observation that, after the four events, GM’s stock decreased in value. “We must evaluate the prudence or imprudence of State Street’s conduct as of ‘the time it occurred,’ not ‘post facto’,” the appellate court’s opinion says, noting that the plaintiffs’ reasoning invites a ‘post-hoc inquiry’ that MPT forbids.

NEXT: State Street’s prudent process

The appellate court agreed with a lower court that State Street had engaged in a prudent process for evaluating GM stock.

The opinion notes that State Street discussed GM stock scores of times during the class period. State Street’s managers repeatedly discussed at length whether to continue the investments in GM that are at issue in the case. State Street’s Independent Fiduciary Committee held more than forty meetings during the Class Period of less than nine months to discuss whether to retain GM stock. 

At those meetings, State Street employees discussed the performance of General Motors, both its stock and its business, and factors that may have affected that performance. Meetings often culminated in decisive votes, ultimately to divest the fund of GM stocks.

In addition, State Street was advised by outside legal and financial advisers which testified that State Street’s process for monitoring GM stock was prudent. And fiduciaries of other pension plans and non-pension-plan investment funds decided, like State Street, to hold GM Common Stock on each of the four “imprudent dates” chosen by the plaintiffs.

The 6th Circuit held that State Street’s actual processes demonstrated prudence, and the decision of other expert professionals both to invest and not to divest on or near the dates that State Street made its decisions demonstrates the reasonable nature of those decisions. 

NEXT: Case history

State Street was hired as the independent fiduciary for the ESOP component of the GM 401(k) plans in June 2006. The suit charged that State Street waited too long to sell off the GM stock in the company’s 401(k) plans; it divested in April 2009, but the plaintiffs claim that after July 2008, offering company stock was no longer prudent. The giant automaker filed for Chapter 11 bankruptcy June 1, 2009.

In 2010, a federal judge in Michigan threw out the case, saying that because participants could choose other investments in the plan, State Street could not be held liable. But, the 6th Circuit disagreed, sending the case back to the district court, saying it erred in relying on the Employee Retirement Income Security Act (ERISA) Section 404(c) safe harbor defense at this stage of the proceedings. 

In 2014, the district court again dismissed the case, finding that State Street engaged in a prudent decision-making process.

The 6th Circuit affirmed this decision. Its opinion in Pfeil v. State Street Bank and Trust is here.

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