Why HSAs are an underutilized retirement vehicle
Lorna Sabbia is managing director and head of retirement and personal wealth solutions for Bank of America Merrill Lynch. She recently shared her perspectives on how employers can help employees prepare for retirement, including her take on the high medical costs retirees face even when covered by Medicare. Highlights of that conversation follow.
Employee Benefit News: In talking to plan sponsors, do you perceive that they generally understand the financial educational needs of their employees?
Lorna Sabbia: I have a lot of great friends who are incredibly talented who work in other industries. Despite their talent, I’m often surprised by how little they know about some very basic financial topics, like managing debt, budgeting, the impact of inflation, compound interest and similar subjects. My point is those of us who are focused on benefits and retirement planning sometimes just want to jump right into that topic without laying the foundation of a more basic education in the fundamentals of personal finance.
EBN: When are employees most receptive to financial education?
Sabbia: That depends on what’s happening in their lives at any given time. While you need a strong communications framework around financial education and financial wellness, it’s equally important to have an on-demand education delivery mechanism. Individuals become interested when they have a need at that nanosecond. Some certainly enjoy the opportunity to become educated on a broad variety of topics over time, but when it becomes important, it’s because something has happened in their life, and therefore they’re reaching out for a specific topic.
EBN: How do you do that?
Sabbia: It has to be a combination of online tools — interactive sites that are pretty intuitive for folks to become better educated. For example, we built apps, which we want to be fun to use, around topics like inflation. More broadly, we think it’s important to help employees overcome emotional barriers both to learn and to make decisions. Automation can help with that.
EBN: I know you’ve focused quite a bit on health expenses in retirement and HSAs. Are HSAs underutilized as a form of retirement savings vehicle?
Sabbia: Yes. When you talk to employees and employers, you can see that health and health savings are key areas of concern. When you think about living expenses in retirement, healthcare is a wildcard, and people are concerned about it. What we try to do, in partnerships with outside subject matter experts, is to bring ideas like longevity and its health-expense implications to the table. Employers often say, “Yep, that’s something we think our employee base would benefit from.”
EBN: Are employers and employees thinking about HSAs as a retirement vehicle?
Sabbia: I think we’re on the front end of having employees really understand what the vehicle can do over time. It’s similar to back in the ‘90s when 529 college savings accounts were beginning to be introduced and eventually really took off. Today, with HSAs, folks are still trying to understand what they are and what they’re not. This is a topic that needs to be incorporated into the overall employee education about finances and retirement.
EBN: When an employer puts an HSA in place, should the message to employees be to contribute as much as they can, regardless of what they’re doing with their 401(k)?
Sabbia: I think we would always suggest that you max out on their 401(k)s, and to the extent that you can contribute to your HSA as well. But the “triple tax free” tax benefits of HSAs help to motivate employees to take advantage of them. We have a “health care discovery app” that deals with what Medicare covers, with dental, vision and long-term care, and cost estimates under different scenarios. It’s the most popular app that we have, even more than Social Security and lifetime income, in employee interest.
EBN: Most people with access to an HSA spend most if not all of the balance every year. Do you expect that to change, and for more employees to see it as a longer-term savings and investment vehicle?
Sabbia: The more education that happens, I do believe the balances over time are going to increase. One estimate I’ve seen [is that] of out-of-pocket health costs for a retirement that lasts 25 years is $220,600, or $318,800 for a 30-year retirement. That gets people’s attention.
Other research I’ve looked at, based on the top 100 HSA providers, indicates that about $4 billion of the $30 billion in HSAs is in longer-term investments. I do expect that proportion will grow.
I do believe that many employees will make the maximum contributions each year when they fully appreciate the benefits — pre-tax dollars that come out tax free, both principal and earnings, even better than a Roth IRA. I believe we’ll see the same evolution that we’ve seen in the 401(k) space, as far as the growth of investment choices. For example, in our program, once an employee has $1,000 in their account in a liquid vehicle, they can make subsequent contributions into 26 different mutual funds.
EBN: The maximum employer plus employee contribution for an individual who has an HSA in conjunction with a high-deductible health plan in 2016 is $3,350, and $6,750. Those aren’t big numbers.
Sabbia: Well, the limits are inflation-adjusted, but we also support the idea that they should be raised more over time. Even so, it’s a great way to save, particularly with all three tax benefits. We do make a major effort with education so that employees know the purposes and time horizons for different asset classes. You can pool diversified portfolios for long-term savings in those types of platforms.