W. Scott Simon
Is there a sizable opportunity for investment advisors to enter the health savings account marketplace to gather, invest, and manage assets? But of course: Only 15% (about $7 billion) of total assets (about $45 billion) now residing in HSAs are actually invested, as opposed to merely sitting in bank accounts/cash accounts/cash equivalent accounts. Hence, 85% of such total assets are still up for grabs (about $38 billion), with an anticipated annual compounding rate of around 25%.
No doubt a good part of why such a low portion of total HSA assets is invested is that many HSA holders use their balances every year, which makes it tough to even begin accumulation of assets for long-term investment. Another factor is that account holders simply haven’t been educated about the investment products offered by some HSA providers.
There is yet another factor which should be noted at the outset to better inform this discussion. That is: Most HSAs are provided by banks, which derive a significant portion of their revenue from the “float” on checking account deposits maintained by HSA holders and on the interchange fees generated by use of the debit card that banks issue to HSA holders. Banks obviously have a real interest in protecting this revenue stream, so they impose a minimum balance ($2,000) that must be built up in the checking account before an HSA holder can begin to access investment options–that is, to invest instead of just maintaining a checking account.
Banks (and insurance companies), which have invested untold millions over the years in studies and surveys to better understand human behavior, count on the inertia of HSA holders to keep on doing what they’ve been doing, thereby ignoring any real long-term investing. This behavior is reinforced by the ease (and profit for banks) of using debit cards to pay for current qualified medical expenses.
An antidote to this business model–which in my view is not optimal for employees, employers, or advisors–is first dollar investing, which is offered to HSA holders by relatively few HSA providers. First dollar investing means no minimum balance is needed to begin investing in an HSA. Ideally, an HSA holder is able to accumulate money outside the HSA to cover (at least) the annual deductible or (at most) the annual out-of-pocket limit in order to begin investing in its HSA immediately.
According to a report issued by HSA Bank in September 2017–Health Savings Accounts: Bridging the Retirement Savings Gap–about 90% of large employers (employing 5,000-plus employees) offer an HSA- qualified health plan/HSA product while 70% of companies of all sizes offer it. That, to say the least, is a target-rich environment for advisors. This provides an opening for advisors well-versed in the defined contribution plan market to approach their existing plan clients: I already invest and manage the assets in your 401(k) plan and now I’d like to do the same for your HSA.
ERISA and the Conflict of Interest Rule
In deciding whether to enter the HSA market, advisors should keep some key points in mind. First, most HSAs are not subject to the Employee Retirement Income Security Act of 1974, because they’re not employee welfare benefit plans. (In contrast, flexible spending accounts are employee welfare benefit plans, which are governed by ERISA as well as other laws such as the Health Insurance Portability and Accountability Act of 1996).
But wait. HSAs are, however, subject to the Conflict of Interest Rule issued on June 9, 2017, by the U.S. Department of Labor. Although not ERISA-defined plans nor IRAs, HSAs nonetheless are treated under the Conflict of Interest Rule as if they are IRAs, thereby subjecting them to the rule.
Any time advisors render fiduciary investment advice for a fee to HSA holders, then, they will be subject to the rule. However, advisors that provide general financial, investment, and retirement education and information about HSAs are not deemed to be rendering such advice and are therefore not subject to the rule.
So even though most HSAs do not fall within the scope of ERISA, advisors are subject to the rule when providing fiduciary investment advice for a fee to HSA holders. (Note, however, that a qualified high- deductible healthcare plan with which an HSA must be paired is subject to ERISA.)
Individual Accounts
Another key point to keep in mind: An HSA is an individual account opened by an account holder in conjunction with enrolling in a qualified high-deductible healthcare plan. As a result, ordinarily there’s no employer ERISA liability for the HSA, unlike an employer-sponsored 401(k) plan which has a single custodial account holding all the plan’s assets.
Since an HSA is an individual account, an advisor typically enters into a contract with each individual HSA holder to which it provides fiduciary investment advice. (“Typically” because it’s possible for an advisor to have a contract with an HSA provider to supply services to groups of employees for a fee. In that case, the advisor would not contract directly with an employee.)
Integrating a Side Car
The term “side car” is often used in the HSA market to refer to the integration of a 401(k) plan, HSA, and IRA. This integration has certain shared elements, which include a common investment option menu, level compensation among all the options, shared data on websites and statements, with an advisor receiving compensation from all three parts of the integration.
Integration in this sense would allow employees (HSA holders and 401(k) plan participants) to sign into their HSA/401(k) portal to see, say, their balances, make any necessary changes and get a general snapshot of their account activities. Some HSA providers, such as HealthEquity, Optum/Empower, and Fidelity, are working to provide employees with the ability to invest in a common set of investment options for an integrated account, thereby simplifying things for employees, employers, and advisors.
It remains to be seen, however, whether truly integrated health and wealth service products will ever emerge. One factor that may prevent this from happening is HIPAA. This federal law requires that certain data privacy and security provisions be followed in order to ensure that medical information such as transactions and records is safeguarded.
Integration, then, is likely to be limited to quarterly statements furnished by HSA providers that display investment options and balances for HSA/401(k) accounts. Websites, statements, transactions, and such won’t be integrated in the sense that an investment advisor (or a record-keeper, for that matter) will be able to see that I paid for a series of visits to a clinic specializing in, say, unusual rashes.
The Best Way to View an HSA
The best way to view an HSA is, in my view, as a retirement savings vehicle that’s an extension of, and supplements, a 401(k) plan account. People have certain financial demands on them in retirement. It’s no secret that an increasingly large portion of the total of those demands–now at about 30% and rising–are healthcare costs (this amount doesn’t even include the costs of long-term care insurance).
Hence, there’s a growing need to save for retirement, whether with an HSA to pay for healthcare costs or with a 401(k) plan to pay for non-healthcare costs. Either way, though, it’s all savings, and either way, it’s all done to meet the financial demands of retirement.
It therefore seems wrong-headed to believe that HSAs are fine to save for paying qualified medical expenses but for overall savings, it’s better to save in 401(k) plans. The apparent thinking here is that contributing money to a 401(k) plan offers a plan participant more flexibility in paying for retirement. That is, assets withdrawn from a plan account can be used to pay for anything, not just for qualified medical expenses as with an HSA. So why maximize contributions to HSAs that can be used only for payment of qualified medical expenses while (possibly) giving short shrift to contributions to a 401(k) account that can be used to pay for anything?
In order to maximize the utility of an HSA, of course, its assets must be used only for paying qualified medical expenses. But even if–at age 65 and thereafter, escaping the 20% penalty–such assets are used for payment of nonmedical expenses, an HSA is still ahead of a 401(k) plan (or an IRA) because any contributions made to an HSA have already escaped payment of the 7.65% FICA tax (assuming that they were made via payroll deductions through an employer’s 125 cafeteria plan) that contributions to a 401(k) plan would incur. (For more on this, see my last column).
An HSA functioning, in effect, as a supplemental retirement savings vehicle to a 401(k) plan, then, is more tax-efficient and flexible than a 401(k) plan or an IRA in helping create wealth for HSA holders whether being used to pay for (tax-free) qualified medical expenses or even (taxable) nonmedical expenses.
Gathering and Investing HSA Assets
The first place to look for HSA assets to invest and manage, of course, is among an advisor’s own defined contribution plan clients. Advisors should ask their sponsor clients if they offer any qualified high- deductible healthcare plan/HSA combinations to their employees. If so, what number of employees are participating, and what amounts, if any, are contributed by the sponsor?
What are the investment options for any existing qualified high-deductible healthcare plan/HSA combinations? What entity offers those options and educates and informs employees about them? Typically, HSA holders don’t receive high-quality education and information regarding their HSA investment options. That job usually falls to health benefits brokers. But they are usually focused more on selling qualified high-deductible healthcare plans, since that’s how they derive their revenue, not from making HSAs available to employees.
Advisors can also offer to collaborate with their plan sponsor clients to help create their own menu of HSA investment options. At present, many HSA investment options are not controlled by plan sponsors but are simply accepted because they’re what is offered by HSA providers. But some sponsors do seek to exercise control by requesting that HSA investment options mirror those in their 401(k) plan.
Given the advisor’s experience with the employer’s existing 401(k) plan, it only makes sense to mirror the investment options in the HSAs with those in the plan. A menu of investment options can surely be designed broadly enough to cover both pools of money.
This approach also has the merit of maximizing efficiency and eases the process of delivering participant education and information. Nor does this require that advisors wait until a company’s open enrollment period (typically, the last months of a calendar year) either. An advisor can add a new HSA to a business–even if other HSAs already exist there–so HSA holders can begin to receive the immediate value brought to them by the advisor.
Those advisors with few (or none) plan sponsor clients offering a qualified high-deductible healthcare plan will have to identify other places to look to invest and manage HSA assets. Wherever they may be, advisors may increase their chances of getting in front of decision-makers by asking questions such as: “Do you as an employer understand that any contributions made by you to an HSA save you 7.65%, plus they lower future premium costs for you because of greater cost-sharing with HSA holders?”
Another place for advisors to look for HSA assets to invest and manage is to offer to work with a healthcare benefits broker(s) and the companies they service. Advisors, for example, can offer to replace brokers in delivering education and information about HSA investment options to HSA holders, especially since brokers aren’t particularly motivated to make that effort.
Advisors can speak directly to employees about the significant value and flexibility of HSAs, and unlike brokers, relate to them in the same way when they have their 401(k) plan advisor cap on. For example, advisors can speak with employees about using an HSA as a supplemental retirement savings vehicle to a 401(k) plan. So through brokers, advisors can gain access to employees and speak to them about both HSAs and 401(k) plans.
Yet another place for advisors to look for HSA assets to invest and manage is to simply acquire a healthcare benefits broker and market directly to sponsors of 401(k) plans.
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. Simon received the 2012 Tamar Frankel Fiduciary of the Year Award for his “contributions to advancing the vital role of the fiduciary standard to investors, capital markets and to society.” The author’s views expressed in this article do not necessarily reflect the views of Morningstar.