PLANADVISER - Spring 2023 - 35

A second reason consumers use HSA funds before retirement
is financial literacy. Those who correctly answer questions
about compound interest, diversification and inflation
are more likely to report planning to use their HSA as a
retirement savings vehicle. Consistent with this stated goal,
employees with high financial literacy also make larger HSA
contributions, have a higher balance and are less likely to
deplete their HSA while working. They are more likely to
choose their contributions based on the HSA's tax benefits.
But financial literacy and liquidity constraints are only
part of the explanation. Even many people with high financial
literacy who have ample liquidity still don't use their
transfer those assets to a personal HSA that you prefer.
" ... framing the decision as one
about how much a participant
would need to save today helps
shift the perspective from the
future to the present. "
HSA as a savings vehicle. More than 40% of such employees
who have an HSA didn't know how their balance was
invested or whether it was held in cash.
Part of this behavior may stem from the complexity of
HSAs. The rules can be complicated, and, understandably,
many people don't know the key features. For example,
some may not recognize that they can use their HSA to pay
for Medicare premiums and out-of-pocket expenses, or longterm
care. Some may incorrectly believe that HSA balances
do not roll over, although in one setting I've studied I found
that not to be the case. Other people may perceive managing
the HSA to be a hassle.
Then there are psychological factors. Some people
may view HSA money as reserved for their current health
expenses, even if they recognize that the money could be
used in retirement. But, from an economic perspective, a
dollar is a dollar. And the best use of an HSA dollar is to let
it grow to take advantage of its unparalleled tax benefits.
People sacrifice a lot of money over their lifetime by not
using the HSA as a savings vehicle. My research finds that
people who receive an extra dollar in their HSA withdraw 85
cents that same year. Most funds are not saved. But paying
for current health expenses from the HSA means you forego
the tax deductibility of investment returns. And a smaller
HSA makes it more expensive to finance health expenses
later in life, since more costs must then be paid with aftertax
dollars. The key to making that strategy work is to invest
HSA assets. If your employer's HSA [program] doesn't offer
good investment options or charges high fees, you may
PA: Many retirement plan advisers have an opportunity
available to them, as most meet with participants either
individually or in a group setting to educate them about
retirement savings. How can they use behavioral strategies
to help participants understand the accounts can
be a type of retirement income?
Leive: The academic literature has not yet rigorously tested
different strategies, but the evidence on related topics
suggests the following approaches could help.
For a significant one, visualizing the financial consequences
of different decisions can
transform the complexity of HSAs into
terms that are easier to understand. For
example, someone in the 25% tax bracket
would need to save $266,666 in their taxdeferred
401(k) account in order to have
the $200,000 an individual is projected to
need to cover health expenses in retirement.
Compare that with having a nontaxable
$200,000-or at least a portion of
that amount-saved in their HSA to pay
for health expenses in retirement.
These types of simplifications can help
with a few challenges. First, they make it
so that participants do not necessarily
need to understand all the details of an
HSA. Second, they help to show the importance of shielding
investment returns from taxation. Exponential growth is a
difficult concept, and combining exponential growth with
tax benefits makes it an even harder one. Third, framing the
decision as one about how much a participant would need to
save today helps shift the perspective from the future to the
present. The hope with HSAs was originally to get people to
trade off future spending against current spending. So any
strategy that makes that trade-off more salient would help
clarify the savings benefits of HSAs.
Part of the challenge is that using an HSA as a retirement
savings vehicle may seem counterintuitive. Explaining other
counterintuitive strategies that the adviser has previously
helped educate participants about could help reinforce why
this strategy works.
For example, I suspect advisers might often discuss with
participants the pros and cons of paying off a mortgage that
has a fixed interest rate, early. If a participant can obtain
a return elsewhere that exceeds their mortgage rate, then
continuing to hold the mortgage debt can pay off in the long
run. This is particularly salient given today's high-interestrate
environment. The same logic applies to the case when
a participant might have multiple sources of debt, and the
question is which debt to pay down first. Paying down the
debt with the highest interest rate first, regardless of the
balance, applies the same logic that " a dollar is a dollar. "
Finally, one strategy I used was to cut my HSA debit card
in half. Destroying the card adds a hurdle that nudges people
toward using the account for retirement savings.
Participants | Spring 2023 | planadviser.com 35
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