HSAs functioning more as 401(k)s

Retirement plan advisers are increasingly interested in helping employer clients with their health savings accounts.

But how should advisers look at these accounts? That depends on whether the employer wants to position the HSA as a transactional account or an investment account.

“They need to start with that question and then build up,” said Aaron Pottichen, president of retirement services at CLS Partners.

For high-income clients who don’t need to withdraw money from their HSAs for current medical expenses, investing in these triple-tax-advantaged accounts can be a particularly useful way to salt away money for medical costs in retirement, according to advisers.

If clients can afford to turn HSAs from transactional accounts into investment portfolios more like 401(k)s, they can accumulate savings quickly. The average HSA investment account has an average total balance of $16,457, which is more than eight times larger than a non-investment holder’s average account balance, according to a 2017 annual report published by Devenir Group.

Risk-averse employees

For companies with more conservative employees — for example, blue-collar workers who may be more risk-averse or may not actively invest — advisers should consider having the investments in an HSA mirror those in the 401(k) lineup, said Eric Remjeske, president and co-founder of Devenir. Such an approach provides familiarity and continuity, and eliminates guesswork, he said.

However, that approach may not offer much to companies with more investment-savvy employees, such as financial services companies, law firms and traditionally higher-income industries where employees already actively invest.

“More sophisticated employer groups may find it more helpful to have more options to diversify into,” Mr. Remjeske said.

All HSA funds should include “need to have” asset classes, such as U.S. large-cap, mid-cap and small-cap equity funds, according to a Devenir HSA best practices report. They also should have international equity funds and U.S. intermediate or multisector fixed-income funds.

Advisers and employers can also broaden portfolios to include emerging-market equities, target-date funds and specialty bonds. If the portfolios expand even further, they can include alternative funds and international fixed-income funds.

“Investment menus should account for various needs that people have,” Mr. Remjeske said.

Compared to the investment options in 401(k)s, investments in HSAs historically have been seen as subpar in quality — they’ve been considered expensive and seen as underperformers that don’t have many asset classes available, according to advisers.

Read more: Comparing the 401(k) vs HSA 

However, according to a Devenir analysis, 89.7% of HSA funds were among the cheapest 50% of all mutual funds in their respective Morningstar investment categories.

“The myth is that the funds being offered are expensive funds, and we’re showing that relative to the marketplace, they’re not,” Mr. Remjeske said.

Vincent Morris, president at Bukaty Cos., an employee benefits and insurance brokerage firm that has about 6,000 HSA accounts and $52 million in assets under administration, recommends active management for HSAs.

For one, it shifts the burden of an investment strategy from a novice to a professional, he said. For another, it allows the adviser to go in and customize an individualized investment strategy based on health, rather than age. Mr. Morris argues that this is a key difference between the investment strategies for HSAs and 401(k)s.

“If a person is 65 and healthy, they could potentially leave their HSA to accumulate aggressively,” he said. ​