Ryan Tiernan: Roughly 75% of employees who have an HSA receive an employer contribution; add that to what employees are contributing, and these balances continue to grow. Today, the average balance is roughly $2,000, but when we look at the longer standing accounts and those accounts taking advantage of investment capabilities, those balances average closer to $15,000.
It’s important to talk about HSAs because advisers are looking to help their clients retire on time and on their own terms. The expense of health care in retirement is a critical part of that conversation. It has been estimated that an average 65-year-old retired couple will need $275,000 for out-of-pocket health care expenses. So, then the question becomes: how do you most efficiently save and invest for that? As their HSA balances grow, people are turning more attention to the investment capability as a means to build health care–specific retirement income.
Initially, our biggest hurdle may be education: helping employers and employees understand how HSAs work, from onboarding of the high-deductible health plan [HDHP] with the HSA, to growing a balance, to then surmounting, perhaps, the minimum deductible or maximum out-of-pocket.
PA: Not all strategies work for every employee at a company, but which employee might consider using an HSA for long-term wealth accumulation?
Tiernan: We often think about this as a barbell. In the employee population today, we see two groups, in particular, who would benefit from exploring the topic: Millennials and highly compensated employees [HCEs].
The HCEs often have much higher take-home income, could experience some kind of corrective distribution or, because of their income, don’t qualify for a Roth or some tax-preferred individual retirement account [IRA]. They also often max out their 401(k) up to the 415(c) limit, so the HSA can be tremendously valuable for them. They can fund the account, and then leave that money to compound via investments.
With Millennials, you have a group of people who are, on average, very healthy, are most often getting an employer contribution, and they have, typically, 40 years until their retirement. They can capitalize on this triple-tax-free vehicle, with both their dollars and their employer’s. The fact that the HSA is portable is also a reason we see many Millennials adopting the HDHP/HSA option.
PA: As an account holder approaches a stated investment threshold, how might
s/he invest the contents of their HSA?
Tiernan: Taking those two populations again, we think mutual funds can play a critical role — risk-based balanced funds and, in particular, target-date funds [TDFs].
Often, people don’t retire when they expect to. However, we all have important, specific dates we can count on: when we turn 65 and become Medicare eligible, when we turn 70.5 and have to start taking required minimum distributions [RMDs]. Therefore, we think target-date funds could play a significant role in HSAs for long-term retirement income planning because at 65, most Americans will become eligible for Medicare. While many folks believe Medicare will cover all their health care expenses, unfortunately, that just isn’t the case.
PA: Finally, how can advisers incorporate information and services about HSAs into their best practices and even their statements of service?
Tiernan: HSA vendor search and selection is something few advisers do, but the attributes their clients look for when selecting their HSA provider are often very similar. Defined contribution [DC] advisers are very familiar with provider characteristics like investment capability and oversight, investment education, and education at the employee level. To the extent advisers encompass these things in their statements of service, and deliver that experience, they can transcend the primary role of 401(k) adviser and become a trusted consultant with a broader perspective on retirement outcomes.
One best practice is to collaborate with other professionals in what we call the “benefits mosaic.” There is a tremendous opportunity for DC advisers to work together with health benefit advisers and brokers. Each then contributes from his or her area of experience.
One example of this collaboration would be advisers helping both the employer and benefit broker explore which HSA investments best suit a particular plan population. To that end, our target-date fund analyzer—American Funds Target Date ProView®—is a fantastic tool for comparing a host of target-date funds. An adviser’s ability to share such information with both sponsors and benefit advisers is yet another way to demonstrate their experience and reach within the corporate benefits package.
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