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HSAs: the next big thing in retirement planning?

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Editor’s note: The Center for Due Diligence 2014 pre-conference program on Tuesday will include three back-to-back sessions on the role of HSAs in retirement planning. Click here for the full pre-conference schedule.  

Plan sponsors are increasingly showing a willingness to incorporate new, more complex approaches to help their employees better prepare for retirement. But there’s at least one new plan design idea that remains largely unfamiliar to many of their advisors: The addition of health saving accounts, which are used to set aside dollars for medical expenses and which, according to a growing chorus of advocates, can help generate the money retirees will need to cover ever-rising health care costs after they leave the work force. 

Health costs are expected to be massive for retirees — even more so for those hoping to remain healthy in their retirement years. A recent HealthView Services study said Medicare premiums for a hypothetical couple living in Massachusetts and expecting to retire at 65 will double to $22,981 by 2034 and to $46,568 by 2044, when that couple would be 85.

The Center for Due Diligence says health plans and retirement plans are converging, but the process has been slow-going.

Eric Remjeske said retirement advisors tend to have the wrong idea when it comes to HSAs. “Advisors look at HSAs and they think, ‘How do I get paid on these?’” he said. 

Remjeske co-founded Devenir, a Minneapolis-based independent advisor to the health savings account industry. Devenir helps design the investment menus for HSAs. It doesn’t work directly with registered investment advisors, but rather with HSA providers and third-party administrators. 

Remjeske says he is seeing an “incremental change” with respect to the adoption of HSAs. But the reason they aren’t being implemented more widely in defined contribution plans is due, in part, to a failing by RIAs to see how HSAs can help them retain and grow their business. 

“Some are getting it — you can almost see the ones that have the lights on when I address the issue. They’re the ones that are thinking, ‘How do I add value for my sponsor clients?’ They’re thinking, ‘How can I best service the client, how can I deliver the solutions they’re looking for?’” 

Paul Oakford, who directs the flexible benefits services unit at Alliance Benefit Group of Illinois, a Peoria-based third-party administrator, said that until now, ABG has mostly ignored the RIA channel. That’s about to change, however. 

“Advisors haven’t traditionally seen HSAs as ‘sticky money’,” explained Oakford. “(HSAs are) not huge with assets so they’re not seen as revenue generators. But the more innovative advisors understand that HSAs are valuable to their sponsor clients. And that makes them valuable to RIAs, no matter how much is in the accounts.” 

As any health insurance broker should know, contributions to HSAs reduce taxable income, the earnings on them build up tax-free, and the distributions for qualified medical expenses are not taxed.

Research by Devenir shows that the average HSA balance is $12,473, including cash and investments. 

That’s not exactly a gold mine, but total assets in HSAs are growing, and doing so quickly. Devenir’s research projects total HSA assets to reach $24.5 billion by the end of the year, and to hit $40 billion by the end of 2016. In 2006, HSA assets had been just about $1.6 billion. 

Oakford thinks that advisors who downplay HSAs are overlooking just how interested employers are in preparing their participants for retirement

He cited, as an example, a recent inquiry from a sponsor. About one-third of the plan’s participants had more than $20,000 parked in cash in their HSAs. The sponsor was concerned that the accounts were too passively invested. 

“Sponsors are starting to understand HSAs as investment vehicles — not just cash balances used to pay out-of-pocket medical costs,” he said. 

That, in fact, may help explain why HSAs have yet to find a more receptive audience among RIAs. 

HSAs started out as cash accounts. Over the past eight years, however, the proportion of HSA assets in investments has steadily grown from virtually zero to about 12 percent, according to Devenir’s research. 

“That’s where HSAs can be grown into a really lucrative supplement to retirement accounts,” said Remjeske. “It’s a matter of educating sponsors and participants. And that’s the greatest challenge we’ve faced so far.” 

Along those lines, Oakford said Alliance Benefit Group has rolled out an HSA model that allows participants to more easily invest the contributions in their accounts. 

In past HSA designs, assets were held in two accounts — cash and the investments in a brokerage account.

With the approach Oakford is hoping more RIAs take notice of, every dollar over $200 in the account is invested, though participants will be able to access up to 95 percent of those assets at any time, without the participant bearing the inconvenience of moving assets from the brokerage account to the cash account. 

Oakford calls it a “401(k) look-alike program.” 

Imagine, he said, how valuable HSAs would be if 20 percent of contributions had been invested over the past 10 years. Or even 30 percent. 

“It’s a tremendous opportunity for RIAs. And a tremendous opportunity for people to save tax-free money for medical expenses that we’re all likely going to have to deal with some day,” said Oakford. 

Some projections from the Employee Benefits Research Institute, released this summer, will no doubt help the cause, even if they seem overly optimistic.

The researchers at EBRI concluded that contributing the maximum amount to an HSA for 40 years, without withdrawing savings, would accumulate $360,000 at a rate of return of 2.5 percent. The numbers grew to $600,000 in savings assuming a 5 percent return and almost $1.1 million at 7.5 percent, according to EBRI. 

Of course, not all RIAs are failing to see the light. 

“It may take a couple of years, but there’s a sea change coming,” predicts Todd Kading, managing director with Leafhouse Financial Advisors, an Austin, Texas-based 3(38) service provider. 

Kading is so confident that HSAs can drive client growth for advisors that he’s made it the focus of his practice in the past year. 

Not only is he not writing retirement plan advisors off, he’s banking on them. “It’s the RIAs that are going to drive this movement,” said Kading. 

He’s so sure of that that he’s partnering with other advisors as a way to grow Leafhouse’s business. 

But like Remjeske and Oakford, Kading says there is a mindset among RIAs that has to change. 

“RIAs have to start thinking about sponsors’ needs,” he said. “And that goes beyond the discussions of fiduciary risk to sponsors, and beyond discussion of investment risk to plan design.” 

“The RIA that can go to an employer and truly understand the extent of risk they carry in their own health care costs, and understand how to help reduce future liabilities — that’s an RIA with a real advantage,” he said. 

That advantage, he said, will help with client retention as well as help lure new clients.

“Employers definitely want to provide security for their workers. But they also want them to retire. An older workforce is expensive. Their salaries are higher. And they are much more expensive to provide health benefits for,” Kading said. 

Advisors who can address those issues are the ones who’ll be in greatest demand, he said.