More than 40% of defined contribution plan recordkeepers participated in the HSA market as of 2019, up from 21% just two years earlier.
And while contributions to health savings accounts (HSAs), along with total balances, are still negligible compared with 401k plans or individual retirement accounts (IRAs), the industry is expected to evolve during the next several years in response to trends emphasizing holistic planning and financial wellness, according to the Cerulli Associates.
HSAs have been available to members of high-deductible health plans (HDHPs) for more than 15 years, but despite their established presence, Cerulli finds HSAs remain underutilized—and less widely understood—in comparison with qualified retirement plans.
Its most recent 401k participant survey revealed that HSAs are not top-of-mind for many participants—when asked how they would allocate an additional $1,000, respondents rank HSAs last out of about a dozen options.
“Given that a medical emergency or costly procedure is likely to happen eventually, investors should plan ahead and cover these expenses with tax-advantaged dollars whenever possible,” Anastasia Krymkowski, associate director at Cerulli, said in a statement. “After contributing enough in the 401k to earn the full employer match, a participant’s ‘next dollar’ is likely best directed to an HSA, if available.”
Health care or retirement savings?
While a slight majority of participants with investable assets exceeding $2 million treat their HSA as a retirement savings vehicle, only one-third of respondents with $500,000 to $2 million (i.e., solidly “mass affluent”) do the same.
Cerulli says that more participants in this demographic could benefit from conversations about taking a long-term view of health savings.
Employers and financial services providers should discuss HSAs in the context of emergency savings and retirement planning, not just healthcare elections during annual enrollment.
“The most effective campaigns will adapt to meet plan members at each stage of the process—whether recognizing the value of an HSA and opening an account, funding to meet the deductible, accumulating assets, or investing for the long term,” Krymkowski added.
Employers’ focus on financial wellness and the increased involvement of retirement providers (recordkeepers, advisors, consultants, etc.) is a growing awareness of these benefits and framing HSAs in a longer-term, more holistic context.
“Going forward, the industry will likely feature more nuanced and targeted communications, a streamlined user experience, expanded use of investments, and a prominent role for retirement providers to provide intensive education on the topic of HSAs,” Krymkowski concluded.