In Practice November 16, 2015

HSAs Can Be Like DC Plans for Retirement Health Costs

Health savings accounts can be used much like defined contribution plans to save for retirement, and the key to growth is investing them.
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As the increase in health care costs continues to the surpass the rate of inflation, the use of health savings accounts (HSAs) has increased with the adoption of consumer-directed health care plans by employers.

Alongside this trend, the retirement industry is starting to tout the additional benefits of HSAs as retirement planning tools.

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“Most of Americans are unprepared for health care costs in retirement, and an HSA is the best way to save for that,” said Eric Roberts, a consultant at Nyhart Actuary & Employee Benefits, during a webcast hosted by the Healthcare Trends Institute. He noted that HSAs offer triple tax benefits, and at age 65, Medicare premiums and Medigap coverage are added to the eligible expense list for HSAs.

In addition, at age 65, the 20% distribution penalty for non-medical distributions no longer applies, so those distributions are taxed regularly. Required minimum distributions (RMDs) are not required from HSAs, and HSAs are not taken into account for Social Security means testing.

According to Roberts, many employees mistakenly believe HSAs are like flexible-spending accounts (FSAs); with FSAs, if they don’t use their funds by the end of the year, they will lose them. But, he said employers need to help employees develop a new mindset; they can put more into the HSA each year than they will need and the investment will grow, just like in their defined contribution retirement plan.

NEXT: Allocating savings dollars to HSAs

Roberts even suggests employees move some of their savings dollars from their DC plan to an HSA, as long as they still get the maximum employer match contribution from their retirement plan. For example, if an employee’s DC plan matches up to 6% of his or her deferrals, and that employee is contributing 10% to the retirement plan, he or she could take 4% of the DC plan contributions and put them into an HSA instead.

And this is not exactly a wash, Roberts explains, because HSA distributions for medical expenses are tax-free, and if the employee had to take a distribution from the DC plan, the distribution would have to be enough to also cover taxes.

President of HSA Consulting Services Todd Berkley told webcast attendees that employers can even default employees into contributing to an HSA, with the opportunity to opt out, and the Department of Labor (DOL) says that is ok to do without the HSA becoming an Employee Retirement Income Security Act (ERISA) plan.

Of course, the key to growing HSA savings is to invest the money diligently over time.   

NEXT: Investing HSA savings

Berkley said the investment component of HSAs is “a hidden gem.”  Not all HSAs offer investments, but investments have been widely available and underutilized. He cited research that found after two years in HSAs, only 1.4% are investing, but after five years, 5.6% are investing, and by year eight, 10.5% are.

Focused education will help, Berkley said, and several HSA trustees as well as financial advisers have begun to highlight this capability to employees.

“Investing HSA assets is no different from investing DC plan assets,” Roberts added. “Employees just need to be made aware they can invest them.”

According to Berkley, some plans offer an HSA investment menu that is a modified version of the DC plan investment menu, and some HSA trustees offer open architecture with no restrictions on what investments can be used. He said an employer can offer the same investment menu as the DC plan; as long as the participant can decide whether to invest as well as how, the HSA is not an ERISA plan.

However, Roberts noted that any time employers make decisions about what investments to offer, they should be thinking about the best interest of participants, using the same fiduciary decision-making process as for the DC plan.

“I think we will see more employees viewing HSAs as a way to set aside dollars for retirement, and we need to educate along those lines,” Roberts concluded.

Data & Research November 16, 2015

Head-in-the-Sand Gen Xers Need Retirement Planning TLC

Gen Xers pinballing between unrealistic retirement expectations and paralyzing uncertainty need an adviser who is understanding and empathetic.
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Several factors are creating a domino effect that has a crushing retirement impact for the majority of Generation X.

First, according to the Generations Apart study, commissioned by Allianz Life Insurance Company of North America (Allianz Life), two-thirds (64%) of Gen Xers find themselves frozen by uncertainty whenever they think about retirement. This paralysis means they don’t take any positive actions to secure their financial future, despite their skepticism about Social Security and Medicare.

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Compounding their anxiety about the future is a heavy load of present-tense worry. Nearly three-quarters of Gen Xers (72%) do not think it is possible to figure out what their future retirement expenses will be, and 67% believe the supposed targets are way out of reach.

Then the mood seems to blur: Despite these feelings, Gen Xers express some delusional attitudes about retirement. More than half (55%) say they see themselves having a relaxed, easy time in retirement, and 46% report they will just figure it out when they get there.

At the same time, Gen Xers are generally dubious (92%) about the country’s retirement system, expressing doubt that  pensions, Social Security and Medicare will be there for them and feel they will never have enough saved to stop working. In fact, most (94%) believe it is up to them to build their own retirement nest egg.

This ambivalent mindset calls for empathetic, nonjudgmental financial planning, according to Allianz. This generation may not be ready to retire yet, but they are reaching a pivotal time where it’s crucial to accumulate assets for the future, and it’s worrisome that they’re simply not doing that, notes Katie Libbe, Allianz Life vice president of consumer insights.

Given the overwhelmed feeling that financial planning causes Gen Xers, financial professionals can play a key role in helping them build a solid financial path. Generations Apart found that the best strategy financial professionals can employ when working with Gen X is to be empathetic and nonjudgmental. Sixty-four percent of Gen Xers want a financial professional who makes recommendations that reflect their actual life and choices, not some ideal. And more than a third (34%) seek a professional who does not judge their financial choices, even if they are indulgent.

NEXT: Gen Xers dislike being chided about past decisions.

Not only are Gen Xers stressed about planning, some are also afraid they’ll feel shame in professional financial discussions, especially when it comes to credit card debt. Nearly half (49%) feel that credit cards function as a survival tool for most people. They don’t want someone who wags their finger at past financial decisions. Some say they’d be embarrassed to tell a financial professional if they were carrying a lot of credit card debt. Instead, they want to work with someone who completely understands why they might have credit card debt.

Professionals can help Gen Xers move past their financial issues and clear up misperceptions by understanding what they are looking for: assistance with planning, setting and achieving long-term financial goals, Allianz says. The study revealed that financial professionals have a unique opportunity in this area because the majority of Gen Xers (67%) are willing to delegate some of their financial decisions and plans to their professional.

To establish that lasting relationship, financial professionals should first build trust by helping Gen Xers manage their everyday financial issues—such as building savings or paying off debt. Half of Gen Xers describe themselves as more “live for today” than “save for tomorrow,” and 44% say they will splurge on something they want. Some Gen Xers also make investment decisions based on their gut, so a financial professional can be valuable by guiding them to accumulate their savings in the right way.

“If Gen X clients have a low level of financial preparedness, a good starting point for financial professionals is to help address current financial issues. This could even mean offering support to save towards a job transition, if retirement feels distant,” adds Libbe. “When financial professionals help solve immediate financial concerns, it can then open the door to the next phase, like retirement or simply living a lifestyle less dependent on work.”

In short, Libbe says, Gen Xers need to begin facing their financial planning issues head on, and a combination of help from professionals and other resources, especially cost-effective options, is critical if they want to retire or get ready for the stage after their career.

The Allianz Generations Apart Study was conducted online by Larson Research + Strategy in November 2014 with 2,000 U.S. adults ages 35 to 67 with a minimum household income of $30,000.

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