Health savings accounts are getting more popular and some retirement plan advisers, hoping to capitalize on the trend, are integrating them into a service offering for 401(k) clients. But there are a few stumbling blocks. One big hurdle: a dearth of investment options.
While advisers can largely add any mutual fund they desire to a 401(k) plan's investment lineup — a feature known as "open architecture" — that is far from the case with HSAs. The choices are limited and the mutual funds that are available are often relatively poor and costly, advisers said.
"I think a lot of them so far have a bunch of funds with no thoughtfulness behind it," Jania Stout, managing director and co-founder of Fiduciary Plan Advisors, said of existing providers.
Other HSA administrators, she added, have assembled respectable off-the-shelf products, but don't allow advisers and plan sponsors to select the funds available to employees.
For advisers, that poses the practical problem of being unable to set up similar or identical investment lineups for employers' HSAs and 401(k) plans, adding a degree of complexity for participants.
But providers are starting to address the problem. HSA Bank, a division of Webster Bank, rolled out a platform this month with more than 5,000 funds available to advisers.
The administrator, which partnered with the record keeper Aspire Financial Services to serve as the platform's technology backbone, is focusing distribution through retirement plan advisers working with employers that have at least 50 participants. It eventually plans to broaden its reach through wealth managers in the retail market, said chief revenue officer Kevin Robertson.
Ms. Stout said other HSA administrators such as Connect Your Care are working on similar open-architecture platforms.
"The fact they're doing this I think is a big deal, because it sends a signal," said Aaron Pottichen, senior vice president of retirement services at Alliant Retirement Consulting. "It's another example of how the HSA market is slowly recognizing it can actually be a retirement vehicle too."
Advisers tout HSAs — a savings account that's paired with a high-deductible health plan — as a tax-efficient way to save for retirement. They offer savers a
triple tax advantage, via tax-free contributions, investment growth and withdrawal (if the money is used for qualifying medical expenses).
For this reason, many advisers advocate that HSA participants pay medical costs out-of-pocket now instead of paying with HSA funds, and invest the HSA money for long-term growth as with 401(k) assets.
However, many savers use HSAs largely as a type of savings rather than long-term investment account. Of the total $54 billion estimated to be held in HSAs by the end of 2018, just 20% of it is in investments, according to Devenir Research. That share is projected to inch upward, to 22% in 2020.
"Don't focus on the money, focus on the value-add [to clients], because the money will be there eventually," Mr. Pottichen said of 401(k) advisers helping clients with HSAs.
There were 23.4 million health savings accounts as of the end of June, a jump of 11.2% over a year, according to Devenir. Prominent retirement plan record keepers such as
Fidelity Investments and Empower Retirement have
jumped into the market in response. Vanguard Group in November
announced a partnership with the custodian HealthEquity to offer the health accounts to 401(k) clients.
The current HSA investment situation may sound familiar to retirement plan advisers: 401(k) plans, in their nascent stages, had limited options and have only within the last several years begun offering a broad array of funds.
"I bet five years from now, the HSA administrators will look just like the 401(k) administrators," Ms. Stout said.
The HSA Bank platform also tries to patch another hole in the HSA framework: adviser compensation. Most platforms today aren't set up to allow advisers to get paid a fee based on HSA assets, advisers said. That model is one many advisers employ to get paid for their work with 401(k) plans and existing technology makes it difficult for advisers to get paid for their HSA work, they said. The HSA Bank product allows for asset-based compensation.
