On average, EBRI says, account holders appear to be using HSAs as specialized checking accounts rather than investment accounts, but this behavior appears to change the longer an HSA owner holds an account. In other words, EBRI’s longitudinal analysis shows that the more owners have experience with HSAs, the greater the likelihood their usage becomes more investment-like.
The analysis found that accounts open for one year had an average $1,018 year-end account balance, while accounts open for 10 years had an average $7,589 year-end account balance. This demonstrates that the propensity to save in an HSA increases over time, EBRI says.
In 2018, individual contributions averaged $1,166 among those accounts open for one year but averaged $3,355 among those accounts open for 10 years. In addition, 2% of accounts open for one year had investments other than cash, compared with 10% among those open for 10 years.
EBRI notes it is possible that rules requiring minimum balances before investing may have prevented owners of relatively new accounts from doing so, as the accounts would not have reached the minimum balance requirement. Regardless, over time, account owners appear to see the value in investing their HSA balances.
“Such analysis can help not only plan sponsors but providers and policymakers better understand strategies that can help improve employee financial wellness,” EBRI says.
Educating employees about health savings accounts can help them maximize their benefit. “The best time to engage with employees and educate them about health savings accounts is after open enrollment,” says Steve Neeleman, founder and vice chairman of HealthEquity in Draper, Utah.
“Start with three basic messages: HSAs are not use it or lose it accounts, they can be invested and employees can increase how much they put into the account during the year. Light bulbs will go on,” Neeleman says.
Devenir has reported that HSA investment accounts have an average total balance of $15,982—six times larger than a non-investment holder’s average account balance.
In order to educate participants about HSAs, plan sponsors must understand the accounts themselves. And to get employees thinking about HSAs as long-term savings vehicles, Sara Caddy, benefits manager at Dimensional Fund Advisors, says employers should highlight what the ‘S’ stands for—“savings,” versus “spending” in flexible spending accounts (FSAs). She also recommended employers reiterate to employees that the primary expense that increases after retirement is health care. Remind employees that HSA assets left in the account will be rolled over from year-to-year.
A report from Cerulli Associates suggests that pairing HSA and defined contribution (DC) plan communication and administration and modernizing HSA investment menus can help to position HSAs as retirement savings vehicles.
“As individuals become more familiar with HSAs, they are more likely to take advantage of the benefits of the accounts,” says Paul Fronstin, director of EBRI’s Health Research and Education Program.
Most DB Plans Saw Little Funded Improvement in 2019
Plan sponsors will need to consider whether in 2020, as in 2019, stock market returns will be great enough to offset rising liabilities from interest rate decreases.
Despite strong equity returns during 2019, most defined benefit (DB) plan sponsors likely saw only a small improvement to their plan’s funded status over the year.
The funded status of the nation’s largest corporate pension plans edged up slightly in 2019 as historically low interest rate levels mostly offset the strongest investments gains witnessed by plan sponsors since 2003, according to an analysis by Willis Towers Watson
In December
According to River and Mercantile, discount rates ended December up slightly from November. Equity markets posted a solid month, and fixed income investments were generally flat or down for the month. Funded status improvements were likely small, but would depend on equity allocations.
During December, both model plans October Three tracks gained ground for the fourth consecutive month. Plan A improved 2% and finished 2019 even, while Plan B gained less than 1%, ending 2019 up less than 1%. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.
Pension funding ratios increased throughout the month of December, driven primarily by global equity performance, according to Legal & General Investment Management America (LGIMA). It estimates that the average plan’s funding ratio increased 2.1% to 83.2% through December.
S&P 500 aggregate pension funded status increased in December from 85.8% to 86.6%, according to Aon’s Pension Risk Tracker. Pension asset returns were slow at the beginning of December before ending the month with a 1% return. The month-end 10-year Treasury rate increased by 14 bps relative to the November month-end rate and credit spreads narrowed by 11 bps. This combination resulted in an increase in the interest rates used to value pension liabilities from 2.83% to 2.86%.
Northern Trust Asset Management (NTAM) says the average funded ratio of S&P 500 plans improved in December from 85.7% to 87.3%. But, Wilshire Associates estimates the aggregate funded ratio for S&P 500 plans increased by 1.6 percentage points in December to end the month at 88.2%.
During Q4 2019
The fourth quarter was also a good month for DB plan funded status. Barrow, Hanley, Mewhinney & Strauss, LLC estimated that the funded ratio for plans in the Russell 3000 rose to 88.7% as of December 31, 2019 from 85% as of September 30, 2019.
LGIMA estimates the average funding ratio increased from 79.2% to 83.2% over the quarter based on market movements.
According to Aon, pension liabilities decreased as interest rates were up in Q4 2019. Ten-year Treasury rates increased by 24 bps and credit spreads narrowed by 21 bps, resulting in a 3 bps increase in the discount rate during the quarter for an average pension plan. Return-seeking assets rose during the fourth quarter, with the Russell 3000 Index returning 9.1%. Bond performance was weak, with the Barclay’s Long Government /Credit Index decreasing -1.1%. Overall pension assets were up 3.4% in the quarter.
For the year
However, 2019 overall was full of ups and downs for corporate DB plans. “While the financial headlines were all about the strong stock market in 2019, the decline in discount rates was just as significant,” River and Mercantile says.
Willis Towers Watson examined pension plan data for 376 Fortune 1000 companies that sponsor U.S. DB plans and have a December fiscal-year-end date and found the aggregate funded status is estimated to be 87% at the end of 2019, compared with 86% at the end of 2018.
“Significant gains experienced in both the stock and bond markets should have bolstered the financial health of corporate pension plans in 2019,” says Joseph Gamzon, senior director, Retirement, Willis Towers Watson. “However, interest rates were at historically low levels and experienced the largest one-year drop in two decades, resulting in a huge increase in plan obligations and little overall change in the plans’ funded status.”
“The roller coaster ride continued during 2019 as we saw funded status drop as low as 81% but fortunately equities had a strong end to the year leading to an increase in funded status year over year,” says Matt McDaniel, a partner in Mercer’s wealth business.
During 2019, the aggregate funded ratio for U.S. pension plans in the S&P 500 increased from 86% to 86.6%, according to the Aon Pension Risk Tracker. The funded status deficit increased by $19 billion, which was driven by liability increases of $230 billion and offset by asset increases of $211 billion year-to-date.
“Funded ratios increased in 2019 from 86.3% to 87.3%. This is a remarkable improvement considering that the discount rates dropped by more than 100 bps from 3.85% to 2.77% during the year. The exceptional performance from equity has more than made up for the headwinds from rising liabilities,” says Jessica Hart, head of OCIO Retirement Practice at NTAM.
While most estimates of funded status improvements in 2019 were small, some plans fared better than others. According to Barrow Hanley, which estimates funded status for the Russell 3000, “As of year-end, plans achieved a funded ratio greater than any other year-end level since 2007. Many plans likely achieved their highest funded ratio since adopting liability driven investing.”
The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased to 88% as of December 31, 2019, from 85% as of December 31, 2018, according to Mercer.
Looking ahead
“Pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset. Given the current level of market interest rates, it is possible that relief reduces the funding burden through 2028, but the rates used to measure liabilities will move significantly lower over the next few years, increasing funding requirements for pension sponsors that have only made required contributions,” says Brian Donohue, partner at October Three Consulting. “Discount rates edged up a bit last month. We expect most pension sponsors will use effective discount rates in the 3% to 3.4% range to measure pension liabilities right now, a full percent lower than rates at the end of 2018.”
Willis Towers Watson’s analysis estimates Fortune 1000 companies contributed $26.3 billion to their plans in 2019—roughly half of what they contributed in 2018, when many plan sponsors took advantage of the higher tax deductions for pension contributions that existed before the Tax Cuts and Jobs Act of 2017. The larger deduction is no longer available to plan sponsors.
Michael Clark, managing director at River and Mercantile, says, “The big question going into 2020 for pension plan sponsors will be around how to manage funded status risk if rates don’t rise and equity markets experience a downturn.” And, McDaniel says, “As we start a new year, plan sponsors should review their pension risk management strategy to consider whether it is prudent to lock in gains as opportunities arise in this unpredictable market.”
Speaking to DB plan sponsors that may be considering pension risk transfer action in 2020, River and Mercantile says, “Generally, we expect that plans with plan years starting on January 1 would have been better off doing a lump-sum cash out window in 2019 than in 2020. With the large drop in interest rates that occurred during 2019, there were significant opportunities for savings in 2019 that we do not expect to repeat in 2020. However, certain plans will still benefit from such a program. For example, plans with liability-hedging investments supporting their terminated vested liability could “lock in” their high asset values now by cashing out participants and liquidating this part of the portfolio to pay benefits.”