Health savings accounts present several benefits for account holders, and there is growing interest in the market among DC industry executives, but a new report suggests that HSAs continue to struggle to be regarded as a retirement benefit.
Industry constituents who are bullish on the growth potential of the HSA market often describe it as “the 401(k) market from 30 years ago,” according to the fourth quarter 2018 issue of The Cerulli Edge—U.S. Retirement Edition.
“Interest in the HSA market from the DC community (i.e., defined contribution investment-only asset managers, recordkeepers, advisors/consultants) has peaked in the last 12-24 months due to an increased emphasis on holistic financial planning and financial wellness programs,” explains Dan Cook, an analyst in Cerulli’s retirement practice.
Like 401(k) plans in the 1980s and 1990s, HSAs today are supplementary savings accounts, and investments are predominantly oriented toward capital preservation rather than growth, the report explains. 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, the report further adds.
But despite several shared traits, Cerulli emphasizes that it is hesitant to suggest that the HSA market will evolve into “the 401(k) market of the future.” One key distinction, according to the firm, is that HSAs are often used as a spending account to fund short-term needs (e.g., medical expenses incurred during the year) instead of a savings account with a long-term objective.
“Many DC plan participants miss the opportunity to accumulate savings for healthcare 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 Cook. “This knowledge gap can be addressed through education efforts aimed at getting participants, plan sponsors and advisors to view HSAs as a retirement benefit.”
A useful starting point, Cook notes, is to clearly explain the key benefits – such as the triple tax advantage – for HSA account holders. 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., DC plan),” Cook advises. “By fostering a strong connection between HSA and DC plans, providers can help participants associate the HSA with retirement savings.”
Cerulli also suggests that it’s helpful for providers to quantify the impact of health care costs in retirement, as many retirees underestimate the toll that health care can take on their retirement assets.
The report further explains that the transactional nature of the HSA market presents two obstacles for asset managers seeking to grow AUM in this space: (1) the frequency of withdrawals prevents HSA account holders from building a meaningful balance; and (2) individuals are unlikely to allocate their assets to investment products if their primary goal is to fund short-term medical expenses.
Citing data by Devenir Research, the report notes that HSA assets totaled $45.2 billion in 2017, representing a five-year compound annual growth rate of nearly 24%. Yet, of this total, only $8.3 billion was held in investments. And while the share of total HSA assets held in investments has increased in recent years, in dollar terms, the asset management opportunity in the HSA market remains minimal. For reference, the report notes that the $8.3 billion in invested HSA assets is less than 1% of total 401(k) market assets.
Cerulli asserts that for the HSA market to become a legitimate opportunity for DC asset managers, the portion of assets held in investments must continue to grow and HSAs must become better positioned as retirement savings vehicles.
Despite the current limited market, nearly three-quarters (74%) of DC asset managers who view the HSA market as an opportunity to grow AUM describe HSA investment “menu modernization” as a reason for pursuing HSA assets.
As one DC asset manager explains, to maintain non-ERISA status, most plan sponsors take a “hands off” approach to HSA investment menu selection and simply offer all the fund options available from their HSA provider, the report notes. The asset manager adds that, compared with 401(k) plans, due diligence for HSA investments is limited and plan sponsors typically do not thoroughly evaluate important metrics, such as performance and fees.
“While plan sponsors (and their advisors/consultants) are not fiduciaries regarding employees’ HSA assets, they can still receive guidance to ‘take a fiduciary mindset’ and enact basic adjustments (e.g., reduce the number of investment options, provide educational materials) that make it easier for account holders to make investment choices,” the report suggests.
Cerulli also notes that multiple asset managers cite the need for additional regulatory guidance to help facilitate more productive discussions about HSA investments.In the interim, however, asset managers can still take steps to improve the investment prospects of the HSA market in the near term. One suggestion is 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.