Only about 6% of accountholders in the Employee Benefit Research Institute (EBRI) HSA Database invest their health savings accounts (HSAs), despite that being an important way to increase their account balances. EBRI’s study, “Are HSA Investors Born or Made?” finds some of those investors appear to be inherently prone to invest while others are motivated for different reasons.
Among the few who invest their HSAs, EBRI finds roughly 63% do so in their first year of HSA ownership. EBRI says this suggests these HSA investors are “born”—they are immediately engaged and intentionally invest their balances as quickly as possible. The research report notes that this strategy is made easier by HSA providers that allow for first-dollar investing.
For the other 37% of accountholders, the fact that some HSA providers require a certain threshold before balances can be invested may explain why they were investors at some point in the dataset but did not start out that way. However, the study found, other factors were often involved.
Of HSA investors who EBRI says are “made,” the study finds the two most important characteristics that are associated with transitioning to investing are account tenure and balance. In particular, the analysis shows that a one-year increase in account tenure is associated with a similar increase in the likelihood of investing as an account balance that is roughly $3,250 larger.
Additionally, employee contributions also increase the likelihood of investing, which EBRI suggests signals that engagement is an important determinant in transitioning to investing. The study also found that taking a large distribution is associated with a reduced likelihood of transitioning to investing, which the report says may indicate that accountholders try to build their balances back up after withdrawing money from their HSAs before investing.
To encourage employees to use their HSAs as longer-term savings vehicles, EBRI recommends employers consider two strategies. First, it says the fact that account tenure is closely linked to the decision to invest implies accountholders invest because they become more familiar with their HSAs, they learn more about the benefits of investing, or both. “Therefore, an education strategy could be effective in encouraging accountholders to invest,” the study report says.
Second, finding that account balance size seems to be closely linked with the decision to invest, EBRI says employers could consider contributing some seed money to new accountholders, particularly those with very high deductibles.
As of December 31, 2018, the EBRI Database includes 9.8 million HSAs with $22.8 billion in assets. The 2018 data covers 39% of the universe of HSAs and 42% of HSA assets.
Barry’s Pickings: Things That Change and Don’t Change Back …
Michael Barry, president of O3 Plan Advisory Services LLC, contemplates change in the markets and infrastructure brought on by the coronavirus pandemic and what may not—or should not—change back.
This column is about the crisis that we are all living through, broadly. My thoughts at this point are barely coming-into-focus. So, I thought I’d start with the closest thing I have to a (very contingent) set of bottom lines.
What’s our world going to look like when we emerge from this?
At a very abstract level, we are going to have to put less confidence in our notions of equilibrium and consider models that are resilient to intermittent, profound, and (radically) unpredictable disruption.
We are going to have to invest in redundancy (in the broadest sense) and overbuild both our systems/infrastructure and our thinking.
We are going to have less cheap stuff.
For some, these changes will mean that we are poorer than we thought we were. For others, it will simply mean that we are valuing different things.
In what follows I’m going to try to unpack this a little.
Dis-equilibrium
“We will have fewer but more severe crises. … Globalization might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the whole.” Nassim Taleb, the Black Swan (2007) Or as Professor Taleb put it in a recent tweet: “Globalization produce[s] small gains w/ delayed costs. It is what it is.”
In a similar vein, I’ve always liked this joke from The Big Bang Theory: “There’s this farmer, and he has these chickens, but they won’t lay any eggs. So, he calls a physicist to help. The physicist then does some calculations, and he says, um, I have a solution, but it only works with spherical chickens in a vacuum.”
The last hundred years of thinking about finance (narrowly) and economics (more broadly) is littered with examples of theories that look great on paper, except for this one totally unpredictable thing we didn’t take into account. To take one obvious example: Long Term Capital Management, based on Nobel Prize-winning theories that couldn’t miss, until they did.
In the last (more or less) 20 years we’ve gone through four “once in a lifetime,” dis-equilibrizing events. The dot.com crash, the Global Financial Crisis, a long-run secular decline in interest rates, and now the Coronavirus pandemic.
The first two of these events were (at least arguably) endogenous to the financial system—essentially “madness of crowds” style bubbles. The latter two were not. The decline in interest rates was, in my view, the result of declining birth rates and the aging of the first world population. The Coronavirus is, a literal virus.
This history calls into question not just narrow financial theories like those of Merton and Scholes and LTCM, but, in my (very humble) view, two other theories that are much more fundamental:
Modern Portfolio Theory
First: “stocks for the long run,” the efficient frontier, and the notion that there is an “equity premium” that is more or less available to those who, because of their long investment horizons, are able to take on higher risk. All of that may indeed be true, but how long is long? The long-run decline in interest rates, associated with (and in my humble opinion causally related to) longer life expectancy and lower birth rates has—for this whole century (20+ years, which is kind of a long time)—produced a different result. In the stock vs. bonds contest, returns on bonds (absolutely and even more so when adjusted for risk) have beaten returns on stocks over a generation.
This is even more the case with respect to retirement savings, where the necessity to produce retirement income, and the need therefore to reckon with interest rates, must at some point be confronted. Because, even where you’ve made a killing in the stock market, and managed to dodge three once-in-a-lifetime market events (dot.com, GFC, and the Coronavirus), if you need income, you’re ultimately going to have to buy a fixed income asset. As interest rates have gone down, the price of those have gone up. And it turns out maybe you weren’t as rich as you thought you were in terms of income, you were just staying even.
Trade and Comparative Advantage
And second: The notion that (international) trade is always a net improvement.
We don’t live in a vacuum. And it turns out that interacting with foreign actors brings with it risks that aren’t always (as Professor Taleb observed) booked to the current year.
The deeper point about these dis-equilibrating events is that they are (relatively) infrequent and catastrophic. They aren’t subject to the law of large numbers and can’t be tamed by math or science.
Yes but …
None of which is to say that we can do without stocks or trade. If we don’t turn saving into productive investment via the stock market, and if we abandon trade for autarky (economic independence or self-sufficiency)—even with our massive agriculture and energy infrastructure—we will all be truly, dramatically poorer.
What we have to realize, though, is that the wealth produced by investment and trade comes with significant costs that are subject to an un-tamable, Keynesian sort of uncertainty. (Keynes remarked that unlike, say, roulette, which is subject to mathematical laws of probability, things such as “the prospect of a European war … or the price of copper and the rate of interest twenty years hence” are uncertain in different way: “About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”)
And the necessary response to this challenge (in my view, and very much channeling Professor Taleb here) is to maximize our resilience through “redundancy”—understood both in the sense of over-built systems/infrastructure, and in the sense of “things that can be used for more than one purpose”—in the way that GM might repurpose a truck factory to build ventilators.
That is, we may have to start valuing less highly “things that are only ever going to be good for one thing,” and valuing more highly “things that are sort of good at one thing and may be useful for something else.”
By the way—it might be enormously useful to all of us if we introduced a level of this sort of ambivalence into our discourse. For example—there are opinions that others hold that we might think are “obviously stupid” (say, an obsessive germaphobia) that might turn out to be useful, when things get real. If we cut everyone some slack, and thought a little less unambiguously ourselves, we might get along better.
That is all to say that we should not just invest in redundant systems. We also need to invest in redundant thinking.
With humility
Finally, I recognize that I could be wrong about all of this. It’s a strange feeling, living through a drastic event that someone else in the future will analyze with the benefit of massive amounts of hindsight. Like Keynes, I know I don’t know.
In that regard, I’ll close with this quote from T. S. Eliot’s East Coker, written in 1940, another time of radical uncertainty.
There is only the fight to recover what has been lost
And found and lost again and again: and now, under conditions
That seem unpropitious. But perhaps neither gain nor loss.
For us, there is only the trying. The rest is not our business.
Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates
