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Prescribing a cure for under-investment of HSA balances

Imagine buying all the raw ingredients for a fine dinner, and then forgetting to prepare or cook them. You and your family would find dinnertime about as unsatisfying as if you had bought nothing.

Can't imagine anyone doing something so neglectful? Then consider what Americans are doing with their Health Savings Accounts. It is as if they are paying for the right ingredients but neglecting to do anything with them.

That's pretty much the story told by new figures released by the Employee Benefit Research Institute (EBRI) on how Americans are using Health Savings Accounts (HSAs). The numbers show that one fairly encouraging trend is undermined by an eye-popping statistic on the extent to which HSA investment is being neglected.

The encouraging trend? The EBRI found that over the past five years average annual HSA contributions have risen by 24 percent, from $2,348 to $2,922. This exceeds the average annual distribution from HSAs by $1,151, indicating that employees are increasingly using HSAs to accumulate funds for future needs, rather than solely using them as a pool to pay for immediate out-of-pocket costs.

Sadly though, the EBRI found that only 4 percent of HSA participants have their balances invested in anything other than cash. It seems employees are saving for long-term needs, but not investing for them. This is not just a problem of opportunity cost, but one of losing wealth. With cash yields near zero, even the muted inflation of recent years has meant that HSA cash balances are losing purchasing power at a rate of more than 1 percent a year. HSA participants who keep their entire balances in cash are saving money just to lose it.  

Well-intentioned experts will inevitably call for better employee education as the solution to this problem, but the truth is that it just isn't realistic to expect busy employees to acquire the appropriate level of expertise to tackle a subject as complex as investing to meet future liabilities. It's a little like asking sick people to learn enough about medicine to treat themselves, rather than sending them to the doctor.

When people are ill, they go to a doctor who prescribes appropriate treatment. Each individual is still free to choose whether or not to follow the prescription, but a recommended course of action is clearly laid out. Similarly, Perspective Partners has taken the approach of providing personalized guidance to participants while simplifying implementation down to just a couple key strokes. The result is a clear prescription for how each participant can coordinate HSA and 401k assets to maximize employer matching and tax advantages while aligning investments with long-term needs. This is far more effective than simply giving employees the blank slate of an investment menu and generalized advice.

Employees are still free to choose whether or not to follow the indicated investment approach, but at least they are given a recommended solution and an efficient way to implement it. Based on the chronic under-investment indicated by the EBRI figures, it seems many more employees could use this type of prescription.