HSAs are proving themselves to be an effective way to save for the single largest expense in retirement—health care—one that’s rapidly rising despite the best efforts of pundits and politicians alike. So what’s not to like (aside from their relatively low contribution limits)?
The triple tax advantage is a major selling point, and receiving the lion’s share of attention. Yet it too often distracts from other important features that health savings accounts offer.
Patrick Delaney is helping the industry refocus.
The vice president and senior manager of defined contribution investment-only marketing with T. Rowe Price closely follows the HSA space, patiently explaining its potential to plan sponsors and advisors (and journalists).
While he wisely noted HSAs are not the absolute “silver bullet” that many claim, they’re nonetheless getting attention as a way to pay for current health care costs and save for those in the future. Their payroll-deducted, pre-tax nature pairs nicely with other employer-sponsored plans, yet low overall awareness and education remain an obstacle to higher adoption.
Delaney spoke with 401(k) Specialist about the advisor opportunity in HSAs and what’s next for the saving and investment vehicle.
Q: Why do HSAs and 401ks work so well together, and why are HSAs right for participants?
A: We’ve been a thought leader in the financial wellness space for the past few years, and we really saw a connection between these two topics. On the surface you go, “HSAs and health care feel a little disparate from something like financial wellness,” but to us it’s two halves of the same conversation.
If somebody can’t put $1,000 in an emergency fund, how are they going to save for a 35-year retirement and maintain their standard of living?
By extension, how are they going to pay for their health care expenses, which, according to several sources, is eventually going to be the largest slice of the retirement income pie?
So, this is an extension of, “Hey, let’s get the financial house in order.” When someone finally clears out the financial baggage that comes with student loans, credit card repayment and things like having enough in an emergency fund, they suddenly become a lot better at saving for retirement and future health care expenses.
That is why we waded into the space. It’s to continue the conversation we started a few years ago with financial wellness.
Q: What kind of growth are you projecting for HSAs?
A: When you think of the adoption of the HSA and where we are right now, it’s similar to where the defined-benefit/defined contribution system was back in the early 1980s. The onus to save for expenses for retirement, and now health care, is slowly being shifted from employer to employee.
By the end of next year, 87 percent of mega-employers, 72 percent of mid-sized employers and 34 percent of small employers are expecting to offer a consumer-driven plan. So, employer adoption is increasing, and you have about 27 million individual HSAs account holders this year.
But when you take the carryover amount, which is contributions minus withdrawals of all the HSA account holders, you are only looking at about $5.5 billion to $6 billion year-over-year, which means most account holders are using the money in the current year. They are putting it in tax-deferred and whatever is in there is growing tax-free, and then they are withdrawing it tax-free because they are using it for qualified expenses.
I think that once people have the capacity to generate more savings, and again that goes back to the financial wellness issue, I think you’re going to see the assets in the long-term investment portion of HSAs increase.
Q: How should advisors most effectively approach the HSA conversation with plan sponsors and participants?
A: It’s one of those cutting-edge trends that some people might look at and say, “I’m going to stay in my lane. I am not a health care expert and don’t want to play one on TV.”
You can almost turn the question on its head. If advisors are proactively addressing this, my hunch is that they are going to start getting asked about it from benefits committees and plan sponsors. A way to get in front of it is to be proactive and ask a simple question (if they don’t already know): “Does your organization offer a high deductible health plan?”
If so, chances are they have an HSA component to it. And if that advisor, like many advisors out there, conducts educational meetings—be that group or one-on-one meetings—and offers any type of personalized guidance that includes conversations about HSA savings strategies and how they fit into an overall portfolio of defined contribution plans, it’s a great way to add value at an individual level with employees.
Q: Is there a greater awareness of the term HSA in the public, even if they don’t understand the mechanics of how it works?
A: I think there is. To your point, I think everybody hangs their hat on the triple tax advantage. I would say one point of differentiation, especially for T. Rowe Price, is that we don’t consider the HSA the silver bullet solution for saving for future health care expenses.
There are a lot of other financial firms out there that say HSAs are the be-all, end-all solution. They even go through demographic profiles where it feels appropriate for everybody.
But if you’re a young family with two people around age 40 and kids with chronic conditions, and you have no emergency savings and are not putting anything towards your 401k, the HSA may not be a top priority.
We would, therefore, say that the right answer for most people is probably employer-sponsored savings and then, if your demographic fits, HSA savings as well.
Q: So how does the firm see its role in the space?
A: T. Rowe doesn’t have skin in the HSA game at this point; we don’t have an HSA offering.
Our mission has always been to help American workers save more to achieve successful retirements. By extension, this topic is extremely relevant and compelling to plan sponsors and advisors to help ensure the retirement readiness of participants. It’s a space where we want to be additive and add value. And that’s why we do it.
It’s the same thing on the investment-only side of T. Rowe with financial wellness, where we want to set the advisor and our financial service partners up to be the heroes in that financial wellness conversation.
We can say what it is, why it’s important, how advisors can plug in and pitch it, and then we can let the advisor work with the plan sponsor to choose the solution that is most appropriate.
It’s similar to how we’ve approached the health care conversation, where we just want to make sure that the advisor understands why it’s important, how they can bring value to plan sponsors and if they educate and guide participants on an individual level, how they can start incorporating it to bring a more holistic savings strategy to participants.
Q: Where do HSAs go from here?
A: When you’ve got Amazon, J.P. Morgan and Berkshire Hathaway trying to come up with a better health care solution for their over 800,000 domestic employees, it’s top of mind, and it’s trickled down to the retirement space today.
For example, the Plan Sponsor Council of America (PSCA) just started doing HSA research last year. It asked plan sponsors what they thought of HSAs. Fully 75 percent of respondents said, “I view HSAs as a part of my organization’s retirement benefits strategy.”
When we saw that statistic, it was eye-opening. For advisors, it’s an easy way to start participating in conversations that your clients are going to have either with or without you.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.