A Social Security cost-of-living adjustment could have a small but positive impact on retirement planning.
By Cyril Tuohy
Asset growth within health savings accounts (HSAs) is starting to add up. With about $2.3 billion in the investment portion of the more than 10 million HSAs around the country, institutions see a need to offer accountholders a helping hand.
As a result, HSA administrators and banks are starting to provide options for employees, according to Maureen Fay, senior vice president within the health and benefits consulting practice with Aon Hewitt.
“HSAs have tools online, like 401(k)s, but other HSA administrators, like banks, and those that focus on investments, have online and live counselors and in some cases there’s an additional charge for that,” she said.
A third “autopilot” option has also begun to appear as HSA administrators get a sense of the level of investor they are dealing with.
In recent years larger companies — traditionally slower to adopt changes — have given HSAs their seal of approval.
In March 2005, the number of HSA-covered lives in the large-group market was 162,000, slightly above the 147,000 covered lives in the small-group market, according to America’s Health Insurance Plans, a trade group representing health insurers.
Fast forward to January 2013 and the number of covered lives in the large-group market has ballooned to 9.5 million, far ahead of the 2.5 million covered lives in the small-group market, AHIP data show.
To be sure, the bulk of the accountholders aren’t using HSAs as investment vehicles.
The average HSA account balance at the end of last year reached $2,375, up 3.2 percent from 2012, according to data supplied by Devenir Research in its year-end 2013 research report.
For the most part, HSAs remain small-account affairs. The bulk of those HSA balances remain in FDIC-insured savings accounts of the more than 2,200 banks and thrifts offering HSAs.
But as the investment portions of these accounts grow, there will gradually be more incentive for HSA administrators to offer advisory services, particularly if those services are a source of fee income in what is a low-margin business.
Fees are sometimes built into the underlying administrative fee charged to the employer, or show up as an extra charge the employee has to pay, Fay said.
Investment markets performed strongly last year and the Standard & Poor's 500 index is up 6.8 percent in the first half of this year over the beginning of the year.
HSA investment account balances are on the rise with the investment portion projected to reach $3.8 billion or 13 percent of all HSA assets by 2015, according to Devenir. In 2006, investment assets made up only 7 percent of all HSA assets.
Shrewd investors have already picked up on the advantages of opening an HSA, and there are account balances that have reached as high as $150,000 said Todd Berkley, president of HSA Consulting Services in Minnetonka, Minn.
Fidelity Investments spokesman and vice president William Applegate said that for HSA accountholders with assets in the investment portion of their accounts, cash balances average $2,200, but investment balances soar to $11,800.
“We’ve found that of our customers with HSAs, 16 percent of them are invested in the market, and 84 percent are 100 percent in cash,” Applegate said.
For employees with five or even six-figure balances, it makes sense for advisory services and HSA administrators to offer an array of mutual funds or brokerage services.
Employers themselves will continue to stay away from a direct advisory role, the HSA experts also said, as employers don’t want to run afoul of the Employee Retirement Income Security Act (ERISA) and the fiduciary duty such advice entails.
As a result, the advisory functions will be left to the HSA administrators and registered investment advisors (RIAs) like Devenir Research that counsel HSA administrators and institutions that manage HSAs.
Employers like HSAs because they help hold down the cost of health care utilization. Employees like HSAs because they are portable from job to job, like a 401(k), and because employees benefit from the convenience of the payroll deduction.
With more “skin in the game,” employees take more responsibility for their own health care spending actions. Patients insist on a generic drug, for example, or look to get an X-ray at a doctor’s office rather than at a hospital, where services usually cost more.
“We've noticed on average that employers are saving 20 percent in health care costs using an HSA compared with using a traditional preferred provider organization (PPO) or health maintenance organization (HMO) health plan,” Applegate said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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