Data and Research November 12, 2018

Wealthier Participants Say They Don’t Need RMDs for Living Expenses

They want to find other ways to use RMD payments.

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While 88% of high-net-worth consumers between the ages of 65 and 75 are familiar with required minimum distributions (RMDs), 80% say they will not need this money for day-to-day living expenses, according to the new “RMD Options Study” by Allianz Life.

Thirty-two percent are unsure how RMDs will impact their taxes, and 71% said they would like to use their RMD funds to purchase a financial product that could offset their taxes. Ninety-three percent believe it is very important to reduce taxes in retirement.

“For some consumers, RMDs have long been thought of as a necessary evil,” says Paul Kelash, vice president of consumer insights at Allianz Life. “The government mandates that people take them, even though many find they won’t need the money for every day expenses. So, consumers face the challenge of managing the impact on their taxes while being unsure of how to use the leftover funds.”

Fifty-seven percent want the RMD disbursement and tax payment to be automatic, so that they do not have to get involved. Sixty-three percent would like their RMD payments to improve their financial situation, and 79% would like the money to help their portfolio grow. Among those who are working with a financial adviser, 77% say they have gotten good advice on managing their RMDs.

“Different age groups within the study have different priorities for their RMDs,” Kelash says. “The 65 to 70 age group is most interested in tax-deferred growth of their RMD disbursements, and many feel unsure about how to best use their RMDs. In contrast, the 71 to 75 age cohort, who have already started taking their payments, is realizing they don’t need the additional money and are looking to leave a legacy—either to leave to family or another beneficiary like a charity. For those who are taking RMDs or preparing to do so, working with a financial professional is a key way to find a solution to more efficiently handle the taxes on their RMDs and use them in a way that works with their larger financial strategy.”

Data and Research November 12, 2018

HSAs Offer Improved Investment Options

However, Morningstar found fees remain elevated and transparency remains poor.

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Morningstar found that the quality of investment options has improved across health savings accounts (HSAs), but high fees and low transparency remain hurdles.

In its second annual study assessing plans from 10 of the largest HSA plan providers, Morningstar assessed each plan as both an investing vehicle and spending vehicle. When evaluating HSAs as a spending vehicle, Morningstar considered three main components: maintenance fees, additional fees and the interest rates offered on investors’ checking accounts. When assessing the merits as investment vehicles, it considered investment menu design; quality of investments; price; investment threshold, or the amount investors must keep in the account before investing; and performance.

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Morningstar found that the quality of investments across the 10 largest HSA plans remains strong and has improved since last year, with at least half of each plan’s investment options earning Morningstar Analyst Ratings of Gold, Silver or Bronze. Investment menu designs have also gotten better, with several plans taking steps to reduce menu overlap or add core investment options. Still, a number of plans haven’t made the same improvements to their investment choices and many suffer from high fees, explaining why only three receive Positive assessments as an investing vehicle, and just one earns a Positive assessment as a spending vehicle.

Fees vary significantly across plans, and most require individuals to keep money in the account before they can invest. Fees remain elevated. Across the 10 plans, the average cost for passive funds ranges from roughly 0.30% to 0.75% per year, and the average for active funds from about 0.80% to 1.20%. Eight of the 10 plans require investors to keep $1,000 or $2,000 in the account before they can invest, which can create an opportunity cost.

Transparency remains poor, according to the analysis. Only four of the 10 plans evaluated disclose relevant fees, interest rates and investment lineups on their websites, and call centers often struggle to provide this basic information.

From its analysis, Morningstar offered tips for best practices. HSAs as spending vehicles should avoid account maintenance fees, limit additional fees, offer reasonable interest on deposits and provide FDIC insurance. HSAs as investing vehicles should charge low fees for both active and passive exposure, offer strong investment strategies in all core asset classes while limiting overlap among options and allow first dollar investing (by not requiring money to remain in the account before investing).

“Thanks to increased use of high-deductible health insurance plans, which are often paired with an HSA, and unrivaled tax advantages, HSA plans are more popular than ever,” says Leo Acheson, associate director of multi-asset and alternative strategies team at Morningstar. “We’re encouraged by the improvement in the quality of HSA investment options since last year, but the industry can raise its game by providing greater transparency on fees, investment options, and interest rates and further reducing high plan expenses.”

Morningstar’s report on its analysis may be downloaded from here.

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