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Participants may not realize how much health care could
cost them in retirement. Fidelity Investments estimates that
a 65-year-old couple who retired last year will face $285,000
in out-of-pocket medical expenses.
This is where HSAs come in. Cook stresses that money
contributed to an HSA is pre-tax. Better yet, when the funds
are invested-an opportunity many plan sponsors offer-the
money that accumulates grows tax free, and, in retirement, if
the dollars are used for qualified medical expenses, they are
not taxed, either.
" Ask the question: 'Would I rather take that $285,000 from
a 401(k) and be taxed, or the entire amount tax-free through
HSA distributions?' " Cook says.
Long-Term Financial Strategy
The next thing advisers need to consider when instructing
sponsors and participants about HSAs is that they need to
help them " think about things holistically across all benefits, "
says Nate Black, vice president of consumer-driven health at
Voya Employee Benefits in Minneapolis-St. Paul. " In the past
two years, people have started to think differently about
HSAs and how they can be part of the entire retirement
picture. Sponsors are increasingly aware that health and
wealth are tied together, " Black says.
According to Marc Howell, vice president of custom
retirement solutions at Prudential Retirement in Philadelphia,
this should include HSAs, student debt repayment and
emergency savings, along with the participant's nest egg.
Advisers can also help employers and plan sponsors think
holistically about the cost of the benefits-including HSAs-
they offer, Black says, and those benefit expenses are quite
high, he says. For a person earning $40,000 a year, benefits
could cost the employer $35,000 a year.
Howell agrees about the value of visualizing the benefits
budget as a whole. In particular, the adviser can point out
where spending would have the most impact in " recruiting
talent, retaining talent and positioning them to retire
successfully. Advisers who work with clients to maximize
their expenditures and look at benefits holistically will be the
very successful ones today, tomorrow and in the future. "
Plan sponsors unfamiliar with HSAs might be surprised to
learn they can offer them at minimal cost, Black says. " This
can range from zero dollars for the largest plans to $3.50 per
participant, " he says.
Nonetheless, employers might want to consider giving
HSA participants seed money. Perhaps even more effective
would be a match to encourage participation, he says. By
pairing an HSA with a high-deductible health plan (HDHP)-
which is required for offering HSAs-the employer would
save hundreds if not thousands of dollars on health care
costs per employee, and a small match to the HSA would cost
the company relatively little, he observes.
According to Black, just as automatic enrollment and the
employer match moved the needle on 401(k)s, sponsors that
want similar success for their HSA program should seriously
consider a match. " This type of plan design feature will be
important in HSAs going forward, " he says.
For employees, however, Black warns that many HSAs
have hidden fees, just as 401(k)s did two decades ago, and
savvy advisers should be on the lookout. The fee could be a
wrap fee or a charge by administrators if the money is held in
cash rather than invested in a fund that has fees, Black says.
" Fees that don't get much attention, particularly as assets
grow, become much more [damaging], " he says.
Educating participants about the tax and other advantages,
though, is key for an HSA program to succeed, says
David Bree, regional partner with Concurrent Advisors
in Dallas. This especially applies to explaining the value
of investing the money they set aside. This year, the IRS
maximum allowed contribution to an HSA is $3,550 for
self only and $7,100 for families. Those 55 and older may
contribute an additional $1,000 a year, Bree says.
Yet, only 5% to 10% of HSA holders invest the money, with
an average balance of $3,000, Black says.
" Would I rather take that
$285,000 from a 401(k)
and be taxed, or the entire
amount tax-free through HSA
distributions? "
Many HSA holders neglect to use their savings to its
maximum benefit and potential, agrees Jamie Hopkins,
director of retirement research at Carson Group in Bryn
Mawr, Pennsylvania. " Most people just put in enough money
to cover their deductibles. In reality, HSAs should be viewed
as long-term retirement savings vehicles. "
Adviser Fees
As to how advisers can derive revenue from offering HSAs-
either by selling or advising on them-there is no one model
that financial firms follow.
A HealthSavings Administrators Survey revealed that 22%
of advisers are unaware they can earn revenue by offering
HSAs. As HSAs are individually owned, their funds can be
invested, which means a registered investment adviser (RIA)
can be compensated for managing an HSA program, based on
a percentage of assets or a fixed fee.
Hopkins says one option is for advisers to charge a wrap
fee. However, he says, that would put a drag on the performance
of account investments.
Black says some advisers charge sponsors a consulting
fee or derive some revenue from the administrative fees.
" Those are two of the more interesting models, " he says.
However, most advisers don't charge for HSAs, because they
see them as " a way to win new business for themselves in a
competitive environment. "
Robertson says advisers should consider the risk of
losing accounts if they fail to offer HSAs. -Lee Barney
planadviser.com July-August 2020 | 35
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