HSAs in Retirement Planning

A 2017 report by the Employee Benefits Research Institute (EBRI) said that, last year, a 65-year-old man needed $73,000 in savings and a 65-year-old woman $95,000 for each to have a 50% chance of being able to cover premiums and median prescription drug expenses in retirement. If they wanted a 90% chance of having enough saved, the man would need $131,000 and the woman, $147,000.

Having too little money to pay for health care or long-term care is the greatest fear adults have about aging, Genworth found in a survey of 1,200 people, but, despite these apprehensions, only 20% of Americans have taken any steps toward figuring out how to finance, or toward actually financing, long-term care costs.

Over the last decade, as the expense of health care has increased, one way employers have attempted to mitigate this is by offering high-deductible health plans (HDHPs), in some cases with a health savings account (HSA) to allow employees tax-free savings to help finance their medical needs. Due to the flexibility afforded to those saving in an HSA, the accounts have become part of the retirement savings discussion.

Bill Peartree, principal/director of retirement services in the retirement services division of Marsh & McLennan Insurance Agency in San Diego, and Rick Ferguson, client executive, also in retirement services, in the firm’s San Francisco office, note that more defined contribution (DC) plan providers are getting into the HSA business. Few advisers are jumping on the bandwagon just yet; however, the men predict that acceptance, in time, will gain momentum.

While advisers might not be well-versed in these programs, many plan sponsors are. The 2018 PLANSPONSOR Defined Contribution Benchmarking Report shows that 47.0% of plan sponsors offer an HSA, with this number steadily rising concurrently with plan size—22.6% of plans with less than $1 million in assets up to 75.8% of plans with more than $1 billion in assets.

Understanding HSAs

Shelby George, senior vice president of adviser services at Manning & Napier in Fairport, New York, says one of the most compelling reasons employees should use an HSA is these plans allow them to essentially self-insure by setting aside money to pay for out-of-pocket health care expenses.

In a recent article on the firm’s website, George expands on the value of the plans: “These powerful savings vehicles offer a triple tax benefit to consumers. Money goes into them tax-free, can be invested tax-free and comes out tax-free if used for a rather generous list of qualifying medical expenses. Savers can also use their dollars for general expenses in retirement—i.e., after the age of 65. The money does not need to be used by a certain date, is investable and [is] portable between jobs. This means the cash saved in an HSA can compound over the years and become another significant source of savings.”

For calendar year 2018, the annual HSA contribution limit for an individual with self-only coverage under an HDHP is $3,450. For an individual with family coverage, it is $6,900.

George says it is common for employers and providers to allow employees to invest their HSA assets. But there are differences in providers and the way they handle investing, she notes. For example, some may have minimum requirements for amounts held in cash, and employees will need to save up to that amount before they can invest. She adds that, typically, investing HSA assets requires individuals to be proactive, because there is little automation, as with DC plans, and rules can vary widely from employer to employer or provider to provider. However, says George, providers are continuing to develop technology to make investing HSA assets easier.

HSAs as Part of the Practice

George sees an untapped opportunity for advisers to talk to their plan sponsor clients about whether they offer HDHPs and whether these are paired with HSAs. However, she says, such discussion requires deep subject matter expertise.

Kevin Nolan, financial adviser with Essex Financial, in Southport, Connecticut, says most major financial firms have resources about HSAs. Advisers can use these to teach themselves about the accounts, as well as HDHPs, and to help them communicate with sponsors and participants.

For advisers who may be interested in more support or who lack expertise, George says, it is important to work with a benefits broker or an HSA provider that has health plan knowledge and can help educate employers about all options. “The more that advisers can either [cultivate] that expertise themselves or have that in their network, the better prepared they are to handle sponsor concerns and make sure employees’ financial plans are more complete.”

According to Tim Slavin, senior vice president, retirement solutions, at Broadridge in New York City, many times advisers pair with HSA providers. While Broadridge only supplies custody for HSA assets, a number of providers administer HSAs and distributions, give web access or even time with an adviser to help manage investments. He likens the partnerships to the ones advisers have with third-party administrators (TPAs) for DC plans. “Some of the mega adviser firms probably have alliances, but even independent advisers can team up with HSA providers,” he says.

Slavin says he is seeing more advisers involved in offering investment products for HSAs. “Advisers can holistically help participants who have HSAs available—help them with saving and investing in HSAs so they will have money set aside for health care issues in retirement and do not have to tap into their DC plans or use required minimum distributions [RMDs] for health care expenses.”

At Essex, the bulk of the clientele is older than 50; around age 55, these people start to zero in on retirement. Essex advisers educate individual clients about expenses and which ones may go up or down during retirement and then works on a drawdown strategy from their assets, including from DC plans and HSAs.

Nolan says Essex advisers also educate employees about future health care costs, such as long-term care or nursing care expenses in their state. The firm gets data about health care expenses in retirement from providers such as Fidelity, J.P. Morgan and Charles Schwab. According to Nolan, one out of two retirees will be in a nursing home at some point. Clients should know that they can use HSA assets for long-term care premiums as well as nursing home costs.

While health care expenses may not be a traditional conversation for plan advisers, they are of deep concern to plan sponsor clients and their employees. Plan sponsors and “employees are going to be happy when their retirement plan adviser approaches them saying, ‘Let’s talk about Medicare premiums and out-of-pocket health care expenses in retirement and how to invest for that,’” Slavin says.

“Health care costs are so significant to retirement planning that they cannot be ignored,” George says. “HSA education or calculators estimating health expenses were once considered differentiated capabilities, but advisers should think of them as part of their core offering.”

Art by Katherine Streeter