Retirement Savings Optimization

If any positives can come out of the coronavirus pandemic sweeping the globe, one is that more people have realized the need to take care of their health, says Kevin Robertson, chief revenue officer at HSA Bank in Milwaukee. Now is a great time for retirement plan advisers to be talking about health savings accounts (HSAs) with plan sponsors and participants, he says. “The pandemic has raised awareness among people of the critical need to be able to cover health care costs,” Robertson says.

If the millions of Americans who have lost their jobs or been furloughed would have had an HSA, the funds from it could have paid for health insurance premiums—including COBRA [Consolidated Omnibus Budget Reconciliation Act] health coverage, which enables some newly unemployed workers to retain health insurance.

Yet, many sponsors, and even more participants, are unaware of the financial benefits bestowed by these accounts.

“Advisers need to be working closely with plan sponsors and participants to increase their awareness of the health care and long-term care costs they will face in retirement,” Robertson says. “HSAs are just the vehicle that gives advisers the opportunity to engage with people about this critical need.”

Participants may also not know they have access to an HSA; a study by the Plan Sponsor Council of America found that 87% of plan sponsor respondents offer an HSA-capable health option, and 61% said educating employees was their primary concern regarding HSAs.

Jason Cook, vice president of health care emerging market sales at WEX Health in Chicago, says the first thing advisers should emphasize to sponsors and participants about the accounts’ value is their usefulness in retirement to pay for long-term medical expenses and out-of-pocket expenses that Medicare does not cover.

Participants may not realize how much health care could cost them in retirement. Fidelity Investments estimates that a 65-year-old couple who retired last year will face $285,000 in out-of-pocket medical expenses.

This is where HSAs come in. Cook stresses that money contributed to an HSA is pre-tax. Better yet, when the funds are invested—an opportunity many plan sponsors offer—the money that accumulates grows tax free, and, in retirement, if the dollars are used for qualified medical expenses, they are not taxed, either.

“Ask the question: ‘Would I rather take that $285,000 from a 401(k) and be taxed, or the entire amount tax-free through HSA distributions?’” Cook says.

Long-Term Financial Strategy

The next thing advisers need to consider when instructing sponsors and participants about HSAs is that they need to help them “think about things holistically across all benefits,” says Nate Black, vice president of consumer-driven health at Voya Employee Benefits in Minneapolis–St. Paul. “In the past two years, people have started to think differently about HSAs and how they can be part of the entire retirement picture. Sponsors are increasingly aware that health and wealth are tied together,” Black says.

According to Marc Howell, vice president of custom retirement solutions at Prudential Retirement in Philadelphia, this should include HSAs, student debt repayment and emergency savings, along with the participant’s nest egg.

Advisers can also help employers and plan sponsors think holistically about the cost of the benefits—including HSAs—they offer, Black says, and those benefit expenses are quite high, he says. For a person earning $40,000 a year, benefits could cost the employer $35,000 a year.

Howell agrees about the value of visualizing the benefits budget as a whole. In particular, the adviser can point out where spending would have the most impact in “recruiting talent, retaining talent and positioning them to retire successfully. Advisers who work with clients to maximize their expenditures and look at benefits holistically will be the very successful ones today, tomorrow and in the future.”

Plan sponsors unfamiliar with HSAs might be surprised to learn they can offer them at minimal cost, Black says. “This can range from zero dollars for the largest plans to $3.50 per participant,” he says.

Nonetheless, employers might want to consider giving HSA participants seed money. Perhaps even more effective would be a match to encourage participation, he says. By pairing an HSA with a high-deductible health plan (HDHP)—which is required for offering HSAs—the employer would save hundreds if not thousands of dollars on health care costs per employee, and a small match to the HSA would cost the company relatively little, he observes.

According to Black, just as automatic enrollment and the employer match moved the needle on 401(k)s, sponsors that want similar success for their HSA program should seriously consider a match. “This type of plan design feature will be important in HSAs going forward,” he says.

For employees, however, Black warns that many HSAs have hidden fees, just as 401(k)s did two decades ago, and savvy advisers should be on the lookout. The fee could be a wrap fee or a charge by administrators if the money is held in cash rather than invested in a fund that has fees, Black says. “Fees that don’t get much attention, particularly as assets grow, become much more [damaging],” he says.

Educating participants about the tax and other advantages, though, is key for an HSA program to succeed, says David Bree, regional partner with Concurrent Advisors in Dallas. This especially applies to explaining the value of investing the money they set aside. This year, the IRS maximum allowed contribution to an HSA is $3,550 for self only and $7,100 for families. Those 55 and older may contribute an additional $1,000 a year, Bree says.

Yet, only 5% to 10% of HSA holders invest the money, with an average balance of $3,000, Black says.

Many HSA holders neglect to use their savings to its maximum benefit and potential, agrees Jamie Hopkins, director of retirement research at Carson Group in Bryn Mawr, Pennsylvania. “Most people just put in enough money to cover their deductibles. In reality, HSAs should be viewed as long-term retirement savings vehicles.”

Adviser Fees

As to how advisers can derive revenue from offering HSAs—either by selling or advising on them—there is no one model that financial firms follow.

A HealthSavings Administrators Survey revealed that 22% of advisers are unaware they can earn revenue by offering HSAs. As HSAs are individually owned, their funds can be invested, which means a registered investment adviser (RIA) can be compensated for managing an HSA program, based on a percentage of assets or a fixed fee.

Hopkins says one option is for advisers to charge a wrap fee. However, he says, that would put a drag on the performance of account investments.

Black says some advisers charge sponsors a consulting fee or derive some revenue from the administrative fees. “Those are two of the more interesting models,” he says. However, most advisers don’t charge for HSAs, because they see them as “a way to win new business for themselves in a competitive environment.”

Robertson says advisers should consider the risk of losing accounts if they fail to offer HSAs.

Art by Erick M. Ramos