Finding the right balance between 401(k)s and HSAs
To no one’s surprise, health savings accounts (HSAs) have continued to experience major growth throughout 2017. The number of active accounts grew to over 22 million at the end of 2017, up from 1.2 million at the end of 2016, according to Devenir, and the total assets held in these accounts rose to roughly $45.2 billion, a 22% increase over year-end 2016.
While HSAs have been on an upward trend for many years now, in 2017, there were three key reasons for their continued growth surge:
1. Invested Amounts – While assets invested in HSAs grew by 53% in 2017, that included gains due to a 25% surge in stock prices, as measured by the DJIA.
2. Carry-Forward Balances – For the fourth year in a row, HSA contributions exceeded distributions by more than $5 billion. As opposed to spending their HSA balances as they accrue, this continual carry-forward balance shows that a significant percentage of employees are using their accounts as saving vehicles.
3. Payroll Deduction – The percentage of HSA contributions made through payroll deductions increased from 46% of the total in 2016 to 63% in 2017. In addition, the average contribution increased from $1,786 to $1,921, per the Devenir report.
Looking beyond their immediate health expenses, a growing number of employees—44.9% in early 2018 versus 40.5% in early 2017, according to a report released by ConnectYourCare—are viewing HSAs as savings vehicles for their future health care needs.
Healthcare spending during retirement ranges from $250,000 to $400,000. Aware of this, employees increasingly recognize the need to supplement their retirement savings in anticipation of greater medical expenses going forward.
But when it comes to understanding how to cover expenses for current and future healthcare needs, what employees believe and what they do can be vastly different. A study conducted by Alegeus found that 51% of employees fear unexpected healthcare expenses in the near-term, while 68% regard themselves as savers who attempt to carry forward their HSA balances year after year. In reality, however, only 23% save anything beyond the current year and more than 50% underfund their HSAs for near-term needs. Moreover, when asked some basic questions about HSAs, 70% of the Alegeus survey participants could not answer them correctly.
To help improve those outcomes, advisers who assist employers and their employees with retirement and healthcare planning, should be aware of the conclusions put forward in a recent article published by the Journal of Financial Planning. It shows that most employees are better off if they prioritize their savings goals as follows: First, fully fund their HSA to cover the current year’s potential expenses; then invest in their 401(k) plans to receive the full employer match. Finally, after the employer match is achieved, employees should consider further, long-term investments in their HSA accounts.
Advisers who recognize the role of HSAs as savings vehicles, will be better positioned to advise employees on where best to invest their precious savings dollars.