Health savings accounts (HSAs) have been used largely like checking accounts, so cash is the largest component of most HSAs, Jamie Greenleaf, lead advisor/principal at Cafaro Greenleaf, told attendees of PLANSPONSOR’s 2018 HSA Conference in New York City.
HSAs with investments have been using brokerage accounts, or the HSA provider offers a lineup of mutual funds, but most do not even have an investment component, she said. This will change, as health care brokers have been driving plan sponsor adoption of HSAs, but in the future advisers will, Greenleaf said.
Kevin M. Murphy, senior vice president, head of strategic accounts, Defined Contribution Division – US, Franklin Templeton Distributors, Inc., said HSAs are where 401(k)s were 30 years ago. “The evolution of HSAs, specifically to investment menus, will look a lot like 401(k)s but will be faster,” he said.
Greenleaf said the investment lineup for HSAs should go back to the basics and be easy to understand, like investments in 401(k)s were in the beginning: fixed income, equity, balanced and cash.
Murphy said Franklin Templeton thinks of HSA participants in three categories: spenders, savers and investors. For example, Millennials have lower health care costs, so they can max out their savings. However, he said all HSA holders really fall in all three categories—some cash is needed for health care expenses today, some money needs to be saved for emergencies and some should be invested for the future. “Think model portfolios, but more conservative than what we’re used to. Instead of 60% equity and 40% fixed income, more like 15/85,” Murphy said.
While it seems like the simplest investment lineup solution would be to mirror that of a plan sponsor’s defined contribution (DC) plan, Greenleaf said what the lineup is solving for is different, so it should be different than the DC plan. She said she thinks HSA investing should be more like defined benefit (DB) plan investing. “Each year participants will have a liability, so they should invest as such,” she said. “And, it is unknown when participants will have an expense to pay, so plan sponsors have to be thoughtful in the investment lineup they offer. What happens when the economy is not in a bull market, when an employee goes to pay a health care expense and has 30% less than they thought?” Greenleaf agreed with Murphy that plan sponsors should think about model portfolios and, she said, it should be easy for employees to check whether they want short-term, medium term or long term.
Murphy said there is a still a long way to go for investment options for HSAs, but there is innovation and the industry is on the horizon for guaranteed solutions. Greenleaf added that in the HSA market, plan sponsors, participants and providers have to think of them as decumulation vehicles not accumulation vehicles. “It’s as if the participant is age 65 every day,” she said.
According to Greenleaf, products now being addressed for DC plans will be used for HSAs. Insurance carriers will become creative and put together guaranteed products for HSAs, and participants will be willing to pay a certain fee for a guarantee. Market risk, inflation risk and sequence of returns risk can wipe a portfolio out, she said.
Although HSAs are not Employee Retirement Income Security Act (ERISA) plans, following the rules of prudence from ERISA is probably best practice for HSA investment selection, Murphy said. For example, Greenleaf pointed out that the HSA investment market right now is retail based, so employees will pay retail pricing. Plan sponsors should look for providers that can get access to institutional investments and institutional pricing
“I would prepare for HSAs to get notice of legislators and regulators, as well as the plaintiffs’ bar if growth continues, so I would act like a fiduciary. Document decisions like you do with DC plans, and apply lessons learned from administration of DC plans,” Murphy said.
Finally, participants need to be educated about the HSA investment lineup. Greenleaf said participants should be educated about the risks she mentioned so they will not make the wrong investment decisions. Plan sponsors should look for a provider that will communicate with employees. “The worst thing you can do as an employer is have an investment lineup, but the investment manager has no communication with participants, and participants have no place to turn for tools or guidance,” she said.
Greenleaf told conference attendees that the conversation about HSAs is easier than conversations about retirement plans. “Retirement is so far away, and health affects [participants] every month as they pay premiums, so they want to be engaged,” she said. If the right education is continuously rolled out, the more likely participants will be engaged and open to talking about proper investments for their HSAs, she added.