Recently the topic of health savings accounts (HSAs) has become a common theme in conversations with defined contribution (DC) retirement plan providers.
That was certainly the case during a recent interview with Fidelity executives. Besides challenges like the Department of Labor (DOL) fiduciary rule and the glut of Employee Retirement Income Security Act (ERISA) litigation, the firm is also focused on aggressively pursuing growth opportunities. Among these stands the rapidly expanding HSA marketplace.
Currently in the Fidelity book of business just about two-thirds of active HSA contributors are male. Their average age is 45 years; average income is $118,000; and the active HSA users contribute an average of 10.6% of their salary to a DC retirement plan.
Key to note in the data Fidelity shared is that owning an HSA account is not a drag on DC plan savings—in fact the opposite effect seems to be true to some extent. Overall, those employees in the Fidelity book of business who own an HSA contribute more than 10% of their salary to a DC plan, while those without HSA access contribute an average 8.2% to the DC plan. In the aggregate the effect is dramatic, such that those who own HSA accounts have on average saved $119,000 more than their counterparts lacking HSA access.
Fidelity urges financial advisers to think about what these numbers imply—how strongly performing DC plans can be complemented by HSA programming. And there is a huge education gap around HSAs that advisers can dive right into. For example, according to Fidelity, 39% of those who already own an HSA do not fully understand that their balance is not “use it or lose it,” in the manner of a traditional flexible spending account. Half of HSA owners do not know that they can invest their whole balance or a portion of their balance in mutual funds.
Fidelity’s data shows 26.8% of HSA account holders called for assistance in 2016, up slightly from 2015, and 39.8% took action, down from 45% in 2015, yet higher than overall DC.
The Fidelity executives conclude their arguments with a simple warning: The average retiree hitting age 65 today will need as much as $260,000 to cover out-of-pocket health care expenses in retirement. They agreed that for many people the only way to even get anywhere close to this figure will be decades of aggressive saving (and investing) within an HSA.