The prognosis for health savings accounts, the tax-free money used in conjunction with high deductible health insurance, is rosy, according to recent studies, but is there a place for them in the retirement planning world? It depends on who ends up getting the largest share of the market, and how HSAs are used and accumulated, according to financial advisors and analyst groups.
Boston-based Financial Research Corp. projects that HSAs could grow to 8.2 million accounts and estimates that HSAs currently hold $1.1 billion in assets through banks and insurers, a number that is projected to grow to $2 billion by year-end, and reach $48 billion by 2010. Some even argue that projection is too conservative.
For the investment advisory industry, HSAs are "a little blip right now and that's because there's not a lot of money in them just yet because of their newness," says Brad Rosley, a CFP with Fortune Financial Group in Glen Ellyn, Illinois. However, he anticipates an " absolutely massive appeal" for the product, and has set up an HSA for his own family and some of his clients.
But there needs to be some incentive for advisors, he argues. Some banks charge account fees, and an advisor can do the same for a company with, say, 50 employees, but most advisors "will not take serious interest in [HSAs] until there's money to be made, until the account balances are larger," Rosley says.
Lynette Dewitt, a senior research analyst at FRC, says advisors "need to thoroughly understand how the high deductible health plan and health savings account products work, and recommend the best products to the clients that benefit most from them." She says, "Advisors, especially those managing fee-based accounts, will benefit from the additional product sales through their clients' investment in health savings accounts."
Dan Perrin, president of The HSA Coalition in Washington, notes that banks have a head start, having set up most accounts. Insurers and third-party administrators follow in the number two and three spot, with mutual fund companies like Vanguard, Charles Schwab and T. Rowe Price just now getting into the business because they've decided the HSA market is going to be around for a while, Perrin says.
Financial institutions like banks do indeed have an edge, according to TowerGroup, an advisory research and consulting firm. The trend in both HSAs and flexible spending accounts toward incorporating the use of plastic payment cards offers an opportunity for financial institutions, TowerGroup states.
But leading third-party vendors, processors, and healthcare providers are aggressively exploring these same opportunities, TowerGroup points out. An investment-only firm that doesn't have the infrastructure needed to provide HSAs should focus on building distribution via alliances with recordkeepers instead, according the Needham, Massachusetts-based company.
While the account holder is free to invest the tax-free HSA money in mutual funds or any type of qualified vehicle of varying risk, at least one advisor is wary of accumulating the funds to create a large account for retirement. "HSAs are an extremely valuable financial planning tool to address the issue of the cost of healthcare," says Mark Ferris of Yankee Cents Financial Services in Old Saybrook, Connecticut. "But I wouldn't recommend sacrificing your health just to have a large HSA."
An HSA "shouldn't be a huge account--unless you are super-super healthy," says Ferris, who has set up an HSA for himself. At age 65, the 10% penalty for non-health use no longer applies so retirees can take the money out for any purpose and pay tax on it, just like an IRA, or take money out for a qualified health expense and receive it tax-free. The question is, "do you want to spend the money on chiropractor care now or on a cruise later," Ferris says.
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