Repositioning HSAs As Retirement Savings Vehicles

Industry constituents who are bullish on the growth potential of the health savings account (HSA) market often describe it as “the 401(k) market from 30 years ago,” according to The Cerulli Edge—U.S. Retirement Edition, 4Q 2018 issue.

Cerulli Associates says it views this comparison as mostly valid. It points out that like 401(k) plans in the 1980s and 1990s, which were ancillary to defined benefit (DB) plans, HSAs today are supplementary savings accounts. In addition, prior to the Pension Protection Act of 2006 (PPA) and the advent of target-date funds (TDFs) during the past decade, 401(k) plans were invested more conservatively with greater allocations to cash and short-term securities (e.g., money market funds). Similarly, HSA investments today are predominantly oriented toward capital preservation rather than growth.

Some studies also depict a comparable year-over-year growth trend between HSAs and 401(k) plans in the 10 years following inception for each market, respectively.

However, unlike 401(k)s, the frequency of withdrawals prevents HSA account holders from building a meaningful balance to use for health care expenses in retirement, and individuals are unlikely to allocate their assets to investment products (e.g., equity mutual funds) if their primary goal is to fund short-term medical expenses, Cerulli says. Education is one thing that can help refocus the view of HSAs as retirement savings accounts rather than short-term spending accounts, Cerulli recommends.

“Many DC plan participants miss the opportunity to accumulate savings for health care needs in retirement, not because they do not want to invest, but because they do not know that they can use an HSA to invest,” says Dan Cook, an analyst in the retirement practice at Cerulli. “This knowledge gap can be addressed through education efforts aimed at getting participants, plan sponsors, and advisers to view HSAs as a retirement benefit.”

A useful starting point is to clearly explain the triple tax advantage associated with HSAs—contributions reduce taxable income; earnings on the accounts build up tax-free; and distributions from the accounts, for qualified expenses, are not subject to taxation. Cerulli also finds it helpful for providers to quantify the impact of health care costs in retirement.

Another important consideration is the timing and frequency of HSA-related communications. “Cerulli advocates for consistent HSA communications (i.e., conducted year-round) that are linked with the employer’s retirement plan offering (e.g., defined contribution plan),” says Cook. “By fostering a strong connection between HSA and DC [defined contribution] plans, providers can help participants associate the HSA with retirement savings.”

Cerulli finds that more than three-quarters (76%) of DC plan recordkeepers do not offer HSA administration services; most employers that offer both an HSA and a DC plan will use different vendors for each account. However, this dynamic may be shifting, as 31% of DC plan recordkeepers that do not currently administer HSAs indicate they are considering entering this market in the near future.

Recordkeepers with a presence in both HSA and DC plan markets have several advantages, including the ability to aggregate participant data and craft a consistent communication approach, and the potential to offer bundled pricing for plan sponsors.

According to the Cerulli report, HSA investment menu modernization would also be helpful in repositioning HSAs as retirement savings vehicles. One asset manager suggests that providers can make lower-cost share classes (e.g., R-6 shares, I-shares) available for HSAs to help decrease costs for account holders. Research from Morningstar found that the quality of investment options has improved across health savings accounts (HSAs), but high fees and low transparency remain hurdles.

Information about how to purchase the Cerulli report is here.