Health savings accounts are an investment planning opportunity, given most of their $45 billion sits in cash
Jan 8, 2018 @ 3:51 pm
The increasing popularity of health savings accounts is creating a new avenue for financial advisers to add value, while also adding assets under management.
The growth trajectory, which has assets essentially doubling every three years to a projected $64 billion by the end of 2019, has the potential to become a niche service for financial advisers.
“It represents a particular opportunity for advisers focused on the defined contribution market, because if you’re managing a company’s retirement plan, the next logical step is to mirror that with health savings accounts,” said Peter Stahl, president of the consulting firm Bedrock Business Results.
Mr. Stahl said he has been banging the HSA drum for at least five years, trying to encourage financial advisers to include management of the assets in HSAs among their services.
But he said the challenge is the cloud of confusion around health savings accounts, which are often confused with flexible spending accounts that require savers to spend the money on qualified medical expenses by the end of each calendar year.
By contrast, the pre-tax money contributed to an HSA can be invested through a brokerage platform and withdrawn tax-free at any point to be used for qualified medical expenses.
According to Devenir Group, which tracks the HSA market, only about 16% of all HSA assets, or $7.3 billion, is invested beyond cash accounts.
Part of the reason for the low percentage is that most people use the money to pay for ongoing medical expenses and never build up a lot of assets, according to Devenir president and co-founder Eric Remjeske.
But the other reason such a small percentage of HSA assets are being actively invested is that savers are uninformed of the investment opportunities, he said.
“There are a lot of new participants, and people don’t know how to use these accounts when they first get them,” Mr. Remjeske said. “Some people will never be investors because they’re using their money on a regular basis or they think they have to use it or lose it, but a lot of people don’t realize investment options exist.”
By Devenir’s analysis, there are about 20 million individual HSA account holders, and of those, 64% are defined as spenders with a balance of less than $1,000.
Savers, including those with balances of between $1,000 and $5,000, make up 26% of the accounts. And investors, with more than $5,000, represent 10% of the accounts, according to Devenir.
Although they’ve been around since 2004, HSAs gained considerable traction after the passage of Obamacare drove more businesses and individuals toward high-deductible health insurance plans.
HSAs are only available to people with high-deductible plans, a definition that varies by state but generally means an annual deductible of more than $2,700 for a family.
The annual HSA contribution limits have been steadily climbing, and are now $3,450 for an individual and $6,900 for a family.
Individuals with high-deductible plans can contribute to an HSA until they start collecting Medicare, which usually kicks in at age 65, unless they are still working and insured through an employer health-care plan.
But as some financial advisers are learning, as the money builds it can be managed beyond a basic cash account.
“I am absolutely trying to get clients to take advantage of it, but there’s still a huge misunderstanding because so many people still think you have to use the money in a year or you lose it,” said Robin Giles, owner of Apex Wealth Management.
It’s a similar story for Brian Spinelli, senior wealth adviser at Halbert Hargrove.
“It’s challenging for people to understand how they work,” he said. “The biggest thing I’ve seen is a lack of understanding over whether you should be using an HSA.”
Whether his clients invest inside an HSA or not, Mr. Spinelli adds value by helping them evaluate the options of using a high-deductible plan along with an HSA.
For example, it often makes sense to opt for a high-deductible insurance plan with lower monthly premiums because the money saved on premiums can be put into an HSA, he said.
Most advisers recommend accumulating at least money to cover the annual deductible amount before investing any HSA assets, and most HSA providers will only allow investing of assets beyond a $1,000 minimum balance.
Once the accounts have accumulated enough assets to allow for investing, the decision to invest is an obvious one, according to Jeanne Thompson, senior vice president of Workplace Investing at Fidelity Investments.
She cites the “triple-tax savings” as exhibit A.
“The money goes in tax-free, it grows tax-free, and if it’s used for qualified medical expenses, it comes out tax free,” Ms. Thompson said.
Fidelity, which is one of 429 firms currently offering HSAs, saw assets climb 50% last year to nearly $2 billion, while the individual accounts grew by 46% to 650,000.
Fidelity’s research shows a similar pattern of HSAs being used mostly for immediate medical expenses, with about 7% of the accounts investing beyond cash.
“We do a lot of education, and one of the biggest challenges is explaining that the money doesn’t have to be spent at the end of the year,” Ms. Thompson said.