Client Service May 12, 2017

Participants Investing in HSAs Not Cutting Back on 401(k)s

Most participants are taking advantage of the combined benefits an HSA and 401(k) have to offer, but there is still a gap in knowledge of HSA basics among several participants.
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Despite the worry that participants in high deductible health plans (HDHP) with health savings accounts (HSAs) cannot afford to contribute to both the HSA and their 401(k) plans, research by Fidelity Investments finds the opposite. Its clients’ participants who contribute to both vehicles on average defer higher rates (10.6% in 2016) to their 401(k)s, than those saving in only their 401(k)s (8.2% in 2016). Moreover, the firm finds that the overall number of employees contributing to both a 401(k) and an HSA increased by 21%.

“We continue to see people participate at higher levels every year, and we continue to see the deferral rates increase,” explains Will Applegate, vice president, Fidelity Investments.

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A recent study by United Benefit Advisors (UBA) reflects these findings. According to the firm’s survey, HSA enrollment is at 17%, marking a 25.9% increase from 2015, and nearly a 140% increase from five years ago. Moreover, a study by Devenir http://www.plansponsor.com/utilizing-hsas-to-fund-a-healthy-retirement/ projects that by the end of 2018, the HSA market will exceed $50 billion in assets among more than 27 million accounts. 

But despite these findings, there is still much in the HSA space that can be remedied. Among participants, there are still several misconceptions surrounding HSAs. In fact, Fidelity finds that only three out of ten employees surveyed know that HSA money rolls over year after year. For many participants, misconceptions like this present road blocks preventing them from preparing for what is likely to be the most burdensome expense in retirement: health care.

According to Fidelity’s research, http://www.plansponsor.com/retiree-health-care-cost-estimates-reach-record-level/  a 65-year-old couple that retired in 2016 would need an estimated $260,000 to cover medical expenses throughout retirement. Couple that with rising health care costs and the uncertainty of the country’s health insurance system, and today’s employee is looking at a bitter pill to swallow.

NEXT:  Statistics may work to a plan sponsor’s advantage. 

“A lot for our clients are continuing to raise awareness around the costs of health care in retirement, and the fact that the HSA can be a great vehicle to begin addressing that need,” explains Applegate. 

An effective communication strategy can come a long way. Applegate suggests a heavily targeted approach. New employees or those not enrolled yet can be presented with just the basics benefits of HSAs: triple-tax advantages, http://www.plansponsor.com/magazinearticle.aspx?id=6442517510 the ability to use the money now or in retirement, and the chance to use premium savings already garnered from an HDHP.

“For those people engaged but not really contributing, we’ll encourage them to consider contributing up to the plan deductible, or up to the out-of-pocket maximum, and ultimately up to the IRS limit,” says Applegate.

Those saving at the age of 65 or older can also use HSA money to pay for non-medical expenses if they pay the deferral income tax.

But it’s important to place emphasis on participants more subject to inertia.

“Those that are taking the leap and taking advantage of the HSA option tend to be overall better at savings to begin with,” says Applegate.

Another challenge, however, is getting employees to enroll in an HSA-eligible health plan. “We’ve even seen employers do things like not referring to the insurance component as the high deductible plan because that can scare people, but rather as the health savings plan.” He adds that even removing all other options and only offering the HSA-eligible component could be an effective option.

But ultimately, the strategy has to boil down to the easiest and simplest way to present the potential benefits of what an HSA is, and explain what it is not.

“It’s critical to dispel those myths behind HSAs,” says Applegate. “HSA money does roll over and can be used in retirement, which many people still don’t know. And it can be invested, and it is one of the most tax efficient vehicles out there.”

Products May 12, 2017

Merrill Lynch Signals More Flexibility in Fiduciary Rule Response

The firm has consistently been an early mover in announcing fiduciary rule implementation plans—and that trend continued this week with the news that ML advisers will retain some access to commission-based IRAs.
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It was back in October 2016 that Merrill Lynch, known as one of the four big wirehouse broker/dealers in the U.S., would no longer sell products to customers through advised, commission-based individual retirement accounts (IRAs) starting in early 2017.

The firm was one of the first nationally known providers to broadcast its plans for responding to tougher conflict of interest restrictions approved by the Obama administration but left to be implemented by his successor, and it actually moved a few months later to accelerate its response and immediately cut mutual fund-commissioned IRA sales.

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Keeping with the trend, Merrill Lynch was also one of the first firms to publicly pivot on the fiduciary rule after the election of Donald Trump as President and the Republican sweep of Congress. At that point, details emerging from the firm suggested it would delay some of its planned reform strategies and enter, more or less, a wait-and-see mode, given the new president’s outspoken criticism of new financial regulations. Firm leadership told PLANADVISER they felt a need to remain “flexible and adaptive in such a rapidly evolving and as-yet-unclear environment.” One extension of this was that the firm delayed work to implement “fee leveling” for advisers and clients using the Investment Advisory Program, a task that was expected to be quite challenging not just for Merrill Lynch but for all providers with similar sales structures and product offerings.

Important to note, at that time the firm was not expressly backing away from its plans to enact restrictions of sales of certain products, most notably mutual funds, within commission-based IRAs—so it seemed that fundamentally the new approach remained the same for Merrill Lynch moving forward. The firm also said it would continue to work with third-party asset managers to “significantly improve and automate the process around sales charge waivers to ensure that clients are receiving all appropriate savings privileges, whatever platform they use.” One component of this sales charge waiver policy would be to enable an automatic non-taxable exchange of C shares to load-waived A Shares for some clients. 

Outlining its current position, the firm tells PLANADVISER it is “operating under the assumption that the applicability date of the Department of Labor’s fiduciary rule will be June 9.” And as the firm told its own advisory force in a memorandum from Andy Sieg, head of wealth management, “foremost in our mind is the need to ensure you have the resources and support necessary to provide investment advice in our clients’ best interests with respect to their retirement accounts … Our primary vehicle for delivering ongoing advice and service for our clients’ retirement accounts will be the Investment Advisory Program (IAP).”

However the firm says it has also “analyzed the limited situations where recommending a fee-based arrangement might not be in a client’s best interest and have considered alternatives to IAP for these situations.”

The firm declined to go into further detail at this juncture, but it stands to reason that it will be adding products to the Investment Advisory Platform (IAP) to improve the adviser and client experience—for example, advisory share class annuities within IAP. There is also the chance that the program will be evolved to offer hedge funds, new-issue certificates of deposit, and other market-linked investments within IAP.

There is further speculation among those following Merrill Lynch’s progress in this area that it could very likely continue to offer “limited-purpose brokerage IRAs.” In addition to IAP, these account would initially be for cash and bank deposits only, but could to expand to include a somewhat wider product set, such as money funds, brokered CDs and concentrated stock positions—such as employer rollovers or transfers.

Depending on what occurs with the actual fiduciary rule implantation, this type of business would most likely require use of the best-interest contract exemption (BICE). Naturally, any brokerage options to which the BICE applies will carry some additional requirements and responsibilities for advisers, to ensure that they can demonstrate compliance with Employee Retirement Income Security Act (ERISA) requirements and show that they have acted in the client’s best interest.

It is likely that more information will emerge from Merrill Lynch and other providers once more clarity comes out of the White House and Congress regarding the real long-term future of the fiduciary rule. Right now the rulemaking has only been delayed and remains fundamentally intact, despite pledges from the President and Congress to fully overturn the Obama-era rulemaking. 

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