Plan sponsors are increasingly showing a willingness to
incorporate new, more complex approaches to help their employees better prepare
for retirement. But there’s at least one new plan design idea that remains
largely unfamiliar to many of their advisors: The addition of health
saving accounts, which are used to set aside dollars for medical expenses and
which, according to a growing chorus of advocates, can help generate the money
retirees will need to cover ever-rising health care costs after they leave the
work force.
Health costs are expected to be massive for retirees — even
more so for those hoping to remain healthy in their retirement years. A
recent HealthView Services study said Medicare premiums for a hypothetical
couple living in Massachusetts and expecting to retire at 65 will double to
$22,981 by 2034 and to $46,568 by 2044, when that couple would be 85. The
Center for Due Diligence says health plans and retirement plans are converging,
but the process has been slow-going.
Remjeske co-founded Devenir, a Minneapolis-based independent
advisor to the health savings account industry. Devenir helps design the
investment menus for HSAs. It doesn’t work directly with registered investment
advisors, but rather with HSA providers and third-party administrators.
Remjeske says he is seeing an “incremental change” with
respect to the adoption of HSAs. But the reason they aren’t being implemented
more widely in defined contribution plans is due, in part, to a failing by RIAs
to see how HSAs can help them retain and grow their business.
As any health insurance broker should know, contributions to
HSAs reduce taxable income, the earnings on them build up tax-free, and the
distributions for qualified medical expenses are not taxed.
Research by Devenir shows that the average HSA balance is
$12,473, including cash and investments. That’s not exactly a gold mine,
but total assets in HSAs are growing, and doing so quickly. Devenir’s research
projects total HSA assets to reach $24.5 billion by the end of the year, and to
hit $40 billion by the end of 2016. In 2006, HSA assets had been just about
$1.6 billion.
HSAs started out as cash accounts. Over the past eight
years, however, the proportion of HSA assets in investments has steadily grown
from virtually zero to about 12 percent, according to Devenir’s research.
In past HSA designs, assets were held in two accounts — cash
and the investments in a brokerage account. HSAs started out as cash accounts.
Over the past eight years, however, the proportion of HSA assets in investments
has steadily grown from virtually zero to about 12 percent, according to
Devenir’s research.
Along those lines, Oakford said Alliance Benefit Group has
rolled out an HSA model that allows participants to more easily invest the
contributions in their accounts. In past HSA designs, assets were held in
two accounts — cash and the investments in a brokerage account.
The researchers at EBRI concluded that contributing the
maximum amount to an HSA for 40 years, without withdrawing savings, would
accumulate $360,000 at a rate of return of 2.5 percent. The numbers grew to
$600,000 in savings assuming a 5 percent return and almost $1.1 million at 7.5
percent, according to EBRI.
Todd Kading, managing director with Leafhouse Financial
Advisors, is confident that HSAs can drive client growth for advisors that he’s
made it the focus of his practice in the past year. He’s so sure of that
that he’s partnering with other advisors as a way to grow Leafhouse’s
business. That advantage, he said, will help with client retention as well
as help lure new clients. He adds that employers definitely want to provide
security for their workers. But they also want them to retire. An older
workforce is expensive. Their salaries are higher. And they are much more
expensive to provide health benefits for. Advisors who can address those issues
are the ones who’ll be in greatest demand.
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