401(k) Specialist Issue 4 - 2017 - 40

HEALTH SAVINGS ACOUNTS
Advisors that help plan sponsors and their
employees grasp this difference will not
only do a better job with their fiduciary
responsibilities but also create a rapidly-expanding
line of business for themselves.
Healthcare liabilities vs.
general retirement liabilities
401(k) assets are invested to fund a broad
range of general retirement liabilities. HSA
balances, beyond what's needed for immediate
out-of-pocket expenses, are meant
to fund long-term healthcare needs. These
needs have several characteristics that
distinguish them from general retirement
liabilities.
Start with the reality that health care liabilities
are growing much faster than general
retirement liabilities.
According to the Bureau of Labor Statistics,
medical care inflation has risen twice
as fast as general inflation over the past 10
years. That overall trend is seen worldwide,
and unlikely to end.
" The political tug-ofwar
over healthcare
laws and entitlement
programs could mean
large, sudden increases
in insurance costs,
as well as new and
unexpected costs not
covered by insurance
as laws change. "
This inflationary tendency is compounded
by the greater need for healthcare in
later years. BLS data shows that healthcare
represents 7.8 percent of all expenditures for
the general population, but this share jumps
to 12.9 percent for people aged 65 and
over. And of course, health care expenses
are often far less discretionary than other
expenditures, like travel and entertainment.
Medical inflation is not only higher, but
possibly more volatile. The political tug-of40
ISSUE
4 2017 | 401kSpecialist.com
war over healthcare laws and entitlement
programs could mean large, sudden increases
in insurance costs, as well as new and unexpected
costs not covered by insurance as
laws change.
Adding to the unpredictability is that actual
healthcare costs are very specific to the
individual. In each geographic location, a
gallon of gas, cable TV, and dozen eggs will
cost more or less the same for every retiree.
Healthcare costs, however, can vary widely
from person to person.
In short, compared to general retirement
liabilities, health care liabilities are faster-growing,
less elastic, and more unpredictable.
Closing
the investment and
liability gap
HSA balances are growing steadily, yet
only 4 percent of HSA account holders
invest in anything other than cash, and
there is a defined gap between the nature
of long-term healthcare liabilities and how
people invest to meet these needs. Given the
difference between general retirement liabilities
and health care liabilities, if mimicking
existing 401(k) products is not the ideal
answer, what is?
Menu design for one, and HSAs should
start to reflect choices geared specifically to
address the nature of healthcare liabilities.
This means more diversity of choice than
in current HSA menus, in terms of both investment
approaches and types of products.
More innovative examples might include
a " target date " fund with a glide path pegged
to projected rather than assumed life expectancy,
or annuities designed specifically
to provide liquidity in synch with future
Medicare premiums. Some of today's HSAIO
(investment only) platforms support advisor-built
models that hint at the possibilities.
Given the highly-individual nature of
healthcare expenses, suitable options to meet
those HSA menu-needs will arguably become
more complicated. But decades of 401(k) experience
have shown that complexity leads to
unintended consequences; it's how behavioral
finance works. It means HSA offerings also
need smarter and more automated tools to
facilitate the implementation of personalized
HSA investment strategies.
After all, managing HSA deferrals and investments
involves many moving parts, even
with relatively simple menus. And it doesn't
matter what the investment options are if the
advantages of HSAs, especially vs. 401(k)s, are
untapped.
HSA deferrals should be coordinated
with 401(k) deferrals to maximize both the
401(k) match and the superior tax advantages
of HSAs, and should be split to cover
both near-term out-of-pocket costs, as
well as retirement health care needs. When
faced with much of this, most HSA account
holders understandably punt and leave their
investments in cash, but automated tools can
manage these decision rules for them.
Beyond more enlightened investment
menu design and user-friendly implementation
tools, the final piece of the solution is
the involvement of advisors who understand
the nature of the liabilities that HSA investments
will fund.
Advisors have a crucial role to play at
the plan-architecture level, and in terms of
ongoing engagement with employees to
help them understand their potential future
healthcare liabilities.
Advisors who are the fastest to make
the link between the nature of health care
liabilities and the tools needed by HSAs will
be in the enviable positions of serving their
clients well as fiduciaries, while seizing the
new business initiative from those who still
view HSA products as a clone of 401(k)
products, or worse, as something to be left
to healthcare brokers.
David Snyder, CEO of Perspective Partners, is passionate
about bringing holistic financial wellness
solutions to retirement plan advisors, sponsors,
and participants. We've helped hundreds of plan
advisors to differentiate with industry-leading
retirement readiness reports and software. Recognizing
the convergence of health and wealth and
the changing priorities of the C-suite, we launched
NestUp Managed Deferrals to improve retirement
readiness and lower healthcare costs by giving
participants holistic decision support and execution
for 401(k) and HSA savings.
http://www.401kSpecialist.com
401(k) Specialist Issue 4 - 2017

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