R6 Shares in HSAs Are Just the Beginning

Franklin Templeton announced it has expanded eligibility of the increasingly popular institutional R6 share class for health savings accounts (HSA), while another retirement plan services provider, Principal Financial Group, unveiled its first collaboration with an HSA provider, HealthEquity.

Franklin Templeton explains its move is aimed at establishing the firm as a leading “HSAIO” provider, short for “HSA investment only,” as opposed to DCIO—or “defined contribution investment only.” Principal says its new partnership is designed to give retirement customers a holistic picture of their retirement outlook, including their HSA balances.

Talking about his firm’s recent work with PLANADVISER, Kevin Murphy, Franklin Templeton’s head of strategic accounts for the defined contribution division, said the HSA topic has been front and center and is about to gain a significant amount of momentum in the DC plan space.

“It has taken us a little more than two years of work within the DCIO team to reach this point,” he said. “We have been out in the marketplace talking about HSAs with all of the advisers and platforms we work with. They are all increasingly seeing HSAs as a future opportunity, but we have had to investigate and educate them as to how this opportunity could be pursued today.”

For Franklin Templeton, Murphy said, the first prong of its HSA-expansion strategy has been to educate advisers in terms of how HSAs can be a value-add and a potential source of revenue. The firm has worked in close collaboration with Access Point HSA—a firm that rolled out an HSA adviser designation about a year and a half ago. At this point there are some 600 individuals who have earned the designation, Murphy said. Not all of them are advisers, but the vast majority are.

“This was really our first goal and a necessary one—to get the word out about the future framework of the retirement savings conversation with respect to health care,” Murphy said. “The second part of the strategy has been to take an approach to try to become the premier HSAIO provider in the marketplace. We are talking about ourselves as a leader in this area, and so as a result advisers are coming to us and asking some frank and challenging questions about how we can support real HSA solutions that will work for their practice and their clients.”

This matches to a significant degree Principal’s explanation for its own HSA-focused activity. Its agreement with HealthEquity allows Principal customers with an HSA through HealthEquity to have the option to access a consolidated view of their financial picture. The Retirement Wellness Planner currently allows people to link to information for other investment accounts to see their full financial picture in one quick snapshot, but this move will bring health care savings into the picture.

“There’s a tremendous benefit in being able to take a holistic view of your financial picture,” said Joleen Workman, vice president of customer care at Principal. “And with health care costs being a top concern for employers, employees and retirees, it’s an important piece of overall retirement planning.”

Like Murphy at Franklin Templeton, Workman said Principal will continue to work with other leading HSA providers to bring a simplified approach to more employees in the workplace. She also noted that, in addition to the HSA enhancement, Principal Milestones, a new plan-focused financial wellness offering from Principal, now includes educational resources on HSAs “to help people use them to their fullest, which may include using the funds for retirement health care costs.”

“More than seven in 10 workers say it would be helpful if their workplace offered education on planning for health care expenses in retirement,” Workman said.  

According to Murphy and Franklin Templeton’s press materials, the last year-and-a-half has seen a strong pace of product development going on among DC plan recordkeepers and third-party providers on the HSA front—with much of the work being dedicated to making the servicing and support of HSAs much more “adviser friendly.”

“From our perspective as the investment manager, we started to see that the availability of quality, low-cost institutional funds to go into these solutions is still limited,” Murphy explained. “In fact, the HSA investment landscape still resembles the 401(k) industry at its inception decades ago. You could say it is like the Wild West in terms of share classes, fees, etc. One question became very clear for us: Why would we not allow our R6 shares into HSAs?”

The short answer was that existing fund prospectuses didn’t allow it, but that was something the firm could easily overcome with some concentrated effort. Murphy and his team went to the board and pushed strongly for this approach to be approved.

“We got permission and filed with the Securities and Exchange Commission back in the fall, and this week it all went live,” Murphy said. “We know it is important for asset managers to take the lead here and to help advisers see the role they can play in supporting HSAs.”  

As to what has so far held back a wider embrace of servicing HSAs among DC plan advisers, Murphy said the short answer is “the inability to provide decent compensation, frankly.”

“At this point, the banks still own the marketplace,” he observed. “It makes sense that things developed this way, since HSAs today and in the past generally have been funded with and maintained as cash, and the dollars do not commonly get invested. For that reason the products weren’t really built to support financial adviser distribution. They were largely sold as sort of an add-on to health insurance and there wasn’t a whole lot of process there that the adviser could get involved in. That’s just the way the industry evolved over the last 14 years or so.”

Why is the situation only changing now? One reason is that HSAs until recently have not really had the assets to catch the attention of the large advisory firms or DC plan providers. But today that is clearly changing as high-deductible health plans (HDHPs) become the norm and employees learn more about what HSAs are and how they can be used for both short-term spending and long-term savings/investing. Indeed, HSA assets are somewhere north of $50 billion today, depending on the source cited, and they are projected to be north of $100 billion within just a few years.

“Some HSA product providers are actually recognizing that the future of growing their business is likely going to be through DC retirement plan adviser distribution, because it can be such a natural conversation to talk about the 401(k) and HSA together,” Murphy said. “Advisers are on the front lines already supporting financial wellness, and the HSA fits squarely into that conversation.”

Murphy noted that the firm continues to hear some pushback from certain advisers who have the position that the HSA marketplace still does not have the necessary assets or average account balances in order to deliver meaningful returns for advisers that want to dive into this kind of work. On the flip side, the firm also hears consistently from “a huge population of advisers that look at this as a long-term play for boosting revenues.” A third camp of advisers looks at HSAs as purely a value-add—not necessarily as a means of generating direct returns but instead as a matter of playing defense and keeping competitors out.

“It’s a very dynamic area, and we believe there are real revenue and client service opportunities ahead,” Murphy said. “In terms of exactly what approaches will be taken by DC advisers, I would say it’s honestly still somewhat to-be-determined. We think that many advisers will favor R6 shares in this context—meaning they would be getting paid their normal advisory fee and the manager would simply collect a low asset-based fee for putting the assets to work in the market.”

To put this another way, Franklin Templeton thinks that the advisory firms that are talking about HSAs have a strong desire to see HSAs more closely mirror the 401(k) side of things, especially when it comes to the investment menu. This approach “just makes sense,” Murphy said, from a governance perspective and for investment monitoring, reporting, etc.

“For that reason, we think the trend of using R6 shares in 401(k)s could easily bleed over and become the norm on the HSA side as well,” Murphy concluded. “But we also know that providing flexibility to advisers and their clients will remain important. This is why we will continue to offer other share classes to HSAs as well. In the end, we believe in the HSA as a very meaningful part of a retirement plan—it’s such an efficient savings and investment and spending vehicle. And we also believe that advisers are in the best position to educate Americans about their future health care costs.”