Few health savings account (HSA) owners understand the importance of directing contributions in these accounts to long-term investments and saving for health care expenses in retirement to extract the most value from HSAs.
Less than 10% of HSA owners invest the contributions, according to Alegeus, a Massachusetts-based HSA provider and technology platform for health plans and third-party administrators (TPAs).
“Not enough consumers invest their HSA funds, and not enough consumers understand that HSAs are long-term savings vehicles,” says Mark Waterstraat, chief customer officer at Alegeus. “If it were easier for them to understand and easier for them to access HSAs through guidance, tools and an integrated experience, they would be more likely to do so.”
Employees often don’t understand that HSAs are distinct from flexible spending accounts (FSAs), so they often use HSAs as short-term spending vehicles don’t extract the maximum value by investing their contributions, he adds.
“You’re not going to get the same multiplication effect that you do if you invest it properly, and that is what consumers most need to understand,” Waterstraat says.
While the industry average of HSA accounts being invested is below 10%, Fidelity Investments’ HSA business has achieved a 20% rate, says Begonya Klumb, head of HSA at Fidelity Investments. Additionally, a Fidelity survey showed that over 50% of account holders are unaware that HSA balances could be invested, she says.
HSAs offer triple-tax advantages to account holders. Investing and contributing, like in a defined contribution (DC) plan, will grow the balance over time, but not enough holders are receiving or adhering to the message, Waterstraat adds.
“I put it in tax free, it grows tax free, and I can take it out tax free as long as I spend it on an approved health care expense item, according to the current IRS [Internal Revenue Service] regulations, which right now include almost every episode of care that you would have with a provider, as well as most over the counter items like prescriptions,” he says. “Almost anything you can imagine that you would spend health care dollars on is approved.”
Alegeus research shows that 29% of HSA owners don’t invest contributions because they don’t earn enough. Many HSA owners (23%) say they want more education, and 21% want a guided and simplified investment experience, to take some of the guesswork out of their decisions, notes Jen Irwin, senior vice president of marketing at Alegeus.
Fidelity Investments estimates that an average retired couple age 65 in 2021 may need approximately $300,000 saved, after tax, to cover health care expenses in retirement.
Despite the growing share of financial responsibility for individual’s health care that will continue, some three-quarters of people don’t know what they need to save over the long term for health care costs, Waterstraat says.
He adds, “All of us are going to face large cost obligations for our care into retirement and very few consumers are prepared for those expenses. They need more than a bank account to prepare, they need guidance, they need a lifetime savings vehicle.”
Alegeus research shows that that 76% of HSA owners did not know that the value of a dollar invested in an HSA over a 25-year period will be worth nearly 40% more than a dollar invested in a 401(k), again due to the special tax benefits.
Account owners have not received enough education from plan sponsors to dispel concerns and grow usage because the process takes several steps, Waterstraat adds.
“If you want to invest, you’ve had to click a button, launch over into some other experience, register with that experience, learn that experience, transfer funds from your HSA over to that investment experience—and now you’ve lost sight of those two different components of your HSA assets,” he warns. “And you’ve got to go back and forth between the two.”
For plan sponsors to reach HSA owners with education, “the first thing that employers absolutely need to do is, if they offer a qualified high deductible health plan [HDHP], they must couple it with an HSA, because not every employer does,” Waterstraat says.
Only about 50% of the qualified HDHPs in the country are pre-coupled with an HSA, he explained.
“It’s not always super simple and intuitive for the consumer to realize they have an HSA available,” Waterstraat says. “Many consumers who have a qualified high deductible health plan would have to on their own go choose to find an HSA in the open market and then, post-tax, put money in and claim those dollars on their tax return.”
Fidelity is supporting plan sponsors to help retirement plan participants with targeted education and personalized messaging to grow HSA use as long-term investments, says Klumb.
“We provide decision support tools for our customers to help them figure out how much to contribute to each of their [retirement and HSA] programs,” she says. “We have developed a hierarchy. We personalize the message and the education and communication because the message to someone who doesn’t even know the benefits of high deductible health plans is different than the message sent to someone saving money and who now needs to take the next step of investing.”
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