Too many 401k advisors instinctively overlay 401k menus onto advisor-friendly HSA platforms. It’s not a surprise; advisors have sweated over fees, glide paths, performance, asset allocation, active vs. passive approaches and other technical details in building their menus.
If the advisor deems a given menu to be good enough for an ERISA 401k plan, why not use it as an HSA menu?
Because doing so ignores a fundamental consideration—HSAs fund very different liabilities than 401ks.
Advisors that help plan sponsors and their employees grasp this difference will not only do a better job with their fiduciary responsibilities but also create a rapidly-expanding line of business for themselves.
Healthcare liabilities vs. general retirement liabilities
401k assets are invested to fund a broad range of general retirement liabilities. HSA balances, beyond what’s needed for immediate out-of-pocket expenses, are meant to fund long-term healthcare needs. These needs have several characteristics that distinguish them from general retirement liabilities.
Start with the reality that health care liabilities are growing much faster than general retirement liabilities.
According to the Bureau of Labor Statistics, medical care inflation has risen twice as fast as general inflation over the past 10 years. That overall trend is seen worldwide, and unlikely to end.
This inflationary tendency is compounded by the greater need for healthcare in later years. BLS data shows that healthcare represents 7.8 percent of all expenditures for the general population, but this share jumps to 12.9 percent for people aged 65 and over. And of course, health care expenses are often far less discretionary than other expenditures, like travel and entertainment.
Medical inflation is not only higher, but possibly more volatile. The political tug-of-war over healthcare laws and entitlement programs could mean large, sudden increases in insurance costs, as well as new and unexpected costs not covered by insurance as laws change.
Adding to the unpredictability is that actual healthcare costs are very specific to the individual. In each geographic location, a gallon of gas, cable TV, and dozen eggs will cost more or less the same for every retiree. Healthcare costs, however, can vary widely from person to person.
In short, compared to general retirement liabilities, health care liabilities are faster-growing, less elastic, and more unpredictable.
Closing the investment and liability gap
HSA balances are growing steadily, yet only 4 percent of HSA account holders invest in anything other than cash, and there is a defined gap between the nature of long-term healthcare liabilities and how people invest to meet these needs. Given the difference between general retirement liabilities and health care liabilities, if mimicking existing 401k products is not the ideal answer, what is?
Menu design for one, and HSAs should start to reflect choices geared specifically to address the nature of healthcare liabilities. This means more diversity of choice than in current HSA menus, in terms of both investment approaches and types of products.
More innovative examples might include a “target date” fund with a glide path pegged to projected rather than assumed life expectancy, or annuities designed specifically to provide liquidity in synch with future Medicare premiums. Some of today’s HSA-IO (investment only) platforms support advisor-built models that hint at the possibilities.
Given the highly-individual nature of healthcare expenses, suitable options to meet those HSA menu-needs will arguably become more complicated. But decades of 401k experience have shown that complexity leads to unintended consequences; it’s how behavioral finance works. It means HSA offerings also need smarter and more automated tools to facilitate the implementation of personalized HSA investment strategies.
After all, managing HSA deferrals and investments involves many moving parts, even with relatively simple menus. And it doesn’t matter what the investment options are if the advantages of HSAs, especially vs. 401ks, are untapped.
HSA deferrals should be coordinated with 401k deferrals to maximize both the 401k match and the superior tax advantages of HSAs, and should be split to cover both near-term out-of-pocket costs, as well as retirement health care needs. When faced with much of this, most HSA account holders understandably punt and leave their investments in cash, but automated tools can manage these decision rules for them.
Beyond more enlightened investment menu design and user-friendly implementation tools, the final piece of the solution is the involvement of advisors who understand the nature of the liabilities that HSA investments will fund.
Advisors have a crucial role to play at the plan-architecture level, and in terms of ongoing engagement with employees to help them understand their potential future healthcare liabilities.
Advisors who are the fastest to make the link between the nature of health care liabilities and the tools needed by HSAs will be in the enviable positions of serving their clients well as fiduciaries, while seizing the new business initiative from those who still view HSA products as a clone of 401k products, or worse, as something to be left to healthcare brokers.
David Snyder, CEO of Perspective Partners, is passionate about bringing holistic financial wellness solutions to retirement plan advisors, sponsors, and participants. We’ve helped hundreds of plan advisors to differentiate with industry-leading retirement readiness reports and software. Recognizing the convergence of health and wealth and the changing priorities of the C-suite, we launched NestUp Managed Deferrals to improve retirement readiness and lower healthcare costs by giving participants holistic decision support and execution for 401(k) and HSA savings.
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.
