HSAs Help Super Savers

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1 HSAs Help Super Savers Save Even More DC Plan Savings Get a Boost As more organizations look for ways to save on health care expenses, High-Deductible Health Plans (HDHPs), coupled with Health Savings Accounts (HSAs) have emerged as a unifying vehicle that can help employers and employees alike. But won t HSAs cannibalize Defined Contribution (DC) savings? Can employees find ways to save more in a tough economy? After switching to an HDHP, will employees take monies saved on high health insurance premiums and use those monies to actually save more for their retirement? Although it may seem counterintuitive, we have been able to demonstrate that employees with HSAs truly do save more not less than their peers in their DC plans. This phenomenon has remained true across virtually all incomes and ages for the last three years. 1 With this article, we further examine the so-called Super Savers. These employees may have already been on the path to retirement readiness in their DC plan. Now with the advent of HSAs, they have become even more diligent savers in both savings vehicles. p.1

2 employers should give employees as many savings options as possible. Three Key Takeaways 1. Help Super Saver Employees Save Even More. In an era of rising health care costs and declining retiree medical benefits, employers should give employees as many savings options as possible. When HSAs are added to the mix, those who already save judiciously in their DC plans save even more tap into a symbiotic relationship. Evidence continues to build that HSAs and DC retirement savings plans can complement each other, rather than compete for a fixed allocation of employee savings. Employees who save money in an HSA generally save more in their DC plans and have higher DC balances. This generally holds true across different age and income groups plan ahead for health care cost in later years. Help employees think about using HSAs for longer-term health savings not just a health spending account for current qualified medical expenses. Those with a longer risk horizon should consider investing HSA dollars in options other than cash to help pay for future qualified medical expenses, including those in retirement. p. 2

3 HSAs are not just for the wealthy HSA holders across all income levels defer more in their 401(k) plans than the average DC participant at the same income level (see Figure 1). In 2011, we identified for the first time a positive correlation between HSA and DC savings behaviors. HSA holders contributed more and accumulated more in their DC plans, and this generally held true across income levels and ages. Figure 1 shows a financial savings pattern in which workers had higher DC deferral rates by income. Across all age groups, average DC assets were nearly double for those employees who continuously contribute to both HSAs and in a DC plan than those who were enrolled in a DC plan only. Most likely, these results were achieved by participants who are savers by nature and could be considered among the most engaged of employees. Figure 1: 2012 Average Employee DC Deferral Rates by Income 16% Deferral Percentage 14% 12% 10% 8% 6% 14.4% 13.5% 13.1% 12.1% 11.4% 11.1% 9.7% 9.8% 9.0% 9.1% 8.7% 8.5% 8.2% 8.0% 7.0% 6.0% 4% $20K $40K $40K $60K $60K $80K $80K $100K $100K $150K $150K $250K >$250K Overall Both HSA and DC Plans DC Plan Only p. 3

4 Fidelity data suggests that some people are regarding HSAs as an attractive longer-term savings vehicle. Do HSAs Help People Think DiFFerently about DC Savings? Based on our analysis of HSA account activities, the experience of managing HSAs may have the ability to help employees rethink their DC savings strategies and actions. Those who understand the value of savings are actually saving more in their DC plans compared to their peers even after they open an HSA. What s more, they understand the tax advantages of HSAs and utilize their HSA as a health savings not health spending account. Since very few HSA account holders have maxed out their retirement savings limits, Fidelity data suggests that some people are regarding HSAs as an attractive longer-term savings vehicle to supplement their retirement savings. In fact, some 47% of survey respondents report they understand the tax advantages of HSAs and choose to maximize their HSA contributions over maximizing their 401(k) or other employer-sponsored retirement plan contributions. 4 In our categorization of HSA account holders (see Three Kinds of HSA Holders, page 5), HSA Savers defer 11.1% of salaries in their DC plans. This contrasts with an overall DC deferral rate of 9.1% for all HSA account holders and a 7.4% deferral rate for so-called HSA Spenders. Compared to the general retirement participant community (DC participants without an HSA), the average deferral rate for the same time period was 8.0% (see Figure 2). Figure 2: Average DC Deferral Rate & DC Account Balance by HSA Market Segment DC Assets (in thousands) as of 12/31/2012 $500 $400 $300 $200 $100 $0 11.1% $205.8 Saver 9.5% $170.2 Hybrid 7.4% $128.1 Spender 9.1% $164.0 Overall 12% 10% 8% 6% 4% 2% 0% Average DC Deferral Rate Average DC Account Balance Average DC Deferral Rate Average DC Deferrals for those without HSAs p. 4

5 Three Kinds of HSA Holders: Savers, Hybrids, and Spenders What kind of employees participate in HDHPs and take advantage of HSAs, and how do they use their HSAs? To gain insight on employee behavior, Fidelity has divided its HSA account holder universe into three populations: Savers, Hybrids, and Spenders. Savers are defined as those who kept at least 90% of their annual HSA contributions in their accounts during that period; Spenders who did the opposite paying out at least 90% of what they contributed. The Hybrids fell in between. In Fidelity s 2012 survey of nearly 121,000 HSA holders, Savers represented 23% of the total; Hybrids, 41%; and Spenders, 36% of all HSA holders (see below). The percentage of Savers HSA remained fairly constant at approximately 23% over the last four years. This indicates that a growing number of people understand the longer-term tax advantages of HSAs and are not using the HSA as a spending account. This trend is expected to continue as HSAs grow in popularity. 36 % 23 % Savers Hybrids Spenders 41 % p. 5

6 Spenders utilize HSA dollars to pay for current qualified medical expenses. 5 : 1 Ratio Savers vs. Spenders Why do Savers save and Spenders spend? Fidelity data show that HSA Savers had an average of $5,400 in their accounts at the end of 2012 (vs. $1,100 for Spenders) (see Figure 3). A possible explanation may be simple economics Spenders utilize HSA dollars to pay for current qualified medical expenses, possibly because they may have no other source of funds to do so. HSA Savers OutSAve Spenders by 62% in DC Accounts At the end of 2012, the average HSA Saver had $206,800 in DC plan assets, or 62% more than the average HSA Spender DC account (see Figure 4). These amounts are particularly noteworthy in their contrast to average account balances of employees who do not have access to an HSA. For example, the average account balance of the Spender shown in Figure 4 ($128,000) exceeds the $73,300 average account balance of employees who do not contribute to an HSA. Figure 3: 2012 Average HSA Assets by Market Segment Figure 4: 2012 Average DC Assets by HSA Market Segment $6,000 $5,000 $4,000 $3,000 $5,400 $3,000 $2,900 $250,000 $200,000 $150,000 $206,000 $170,000 $128,000 $164,000 $2,000 $100,000 $1,000 $1,100 $50,000 $0 $0 Savers Hybrids Spenders Overall Savers Hybrids Spenders Overall p. 6

7 THE HSA Saver has accumulated 62% more than the average HSA Spender in their dc account. Watch Your HSA Grow Since the majority of HSA account holders are Hybrids, this hypothetical example shows how the average HSA account might grow over time. The good news is that even for Hybrids (who spend approximately 50% of their HSA dollars on current health care expenses and save the rest), their HSAs can potentially grow to more than $21,000 over a ten-year period. You can watch your HSA grow over time even if you spend some of the money every year on current health care expenses. Even if you save just half of an annual contribution of $3,200 you could see your HSA grow to more than $21,000 in 10 years.* $40 Saver vs. Spender in Year 10; almost 10X more saved $35 $38,101 Assets in Thousands $30 $25 $20 $15 $10 $21,167 $5 $4,233 $ Year Saves 10% Saves 50% Saves 90% *Hhypothetical examples of HSA account balances are based on an annual employer/employee HSA contribution of $3,200 with a 5.5% rate of return over a 10-year period. Assumes contributions, earnings, and distributions are federally tax free. Investing in this manner does not ensure a profit or guarantee against loss in a declining market. Assumes current health care expenses are qualified medical expenses. Starting HSA account balances derived from average annual employer/employee HSA contributions of $3,200 which is based on data from 121,000 Fidelity HSA account holders as of 12/31/2012. p. 7

8 Continuously Invested and Engaged Employees Continue on Path to Retirement ReadineSS with Higher DC Balances The positive trend continues. Examining this phenomenon over a three-year period, the overall DC account balances grew from $188,000 in 2010 to $240,000 at the end of 2012 while those DC account balances for HSA Savers grew from $272,000 to $363,000 over the same three-year period (see Figure 5). Figure 5: DC Account Balances by HSA Market Segment $400 $363 Assets in Thousands $300 $200 $100 $272 $291 $197 $204 $251 $140 $146 $182 $188 $197 $240 $0 Savers Hybrids Spenders Overall Fidelity data based on 23,510 HSA SSNs who contributed each year for the 3-year period from January 1, 2010 to December 31, p. 8

9 Despite the shift to Spenders, average HSA contributions remain constant and the average HSA account balances grew across all HSA segments. Those who remain in HSAs continue to see account growth Not surprisingly, the average three-year Saver had $16,000 in their HSA at the end of 2012 while the average Spender had $2,300 (or approximately 86% less). Overall, those in a Fidelity HSA have accumulated $6,600 (see Figure 6). More good news: even Spenders still have $2,300 in their accounts (and they are spending 90% of what they put in) and 95% of HSA account holders carry a balance forward into the next year. It is interesting to note the shift from Savers and Hybrids to Spenders when analyzing a continuously contributing population over time. Despite the shift to Spenders, average HSA contributions remain constant and the average HSA account balances grow across all HSA segments. Figure 6: Three-Year HSA Account Balances $20 $16.0 Assets in Thousands $15 $10 $5 $9.8 $12.5 $5.0 $6.0 $7.2 $1.4 $1.8 $2.3 $4.5 $5.5 $6.6 $0 Savers Hybrids Spenders Overall Fidelity data based on 23,510 HSA SSNs who contributed each year for the 3-year period from January 1, 2010 to December 31, p. 9

10 Investment Options Beyond Cash or Cash Equivalents Approximately 16% of HSA account holders have invested in non-cash investment options in their HSA brokerage account. Of this group, the Savers have approximately $15,600 in non-cash investment vehicles while keeping $4,100 in cash while Spenders accumulated approximately $7,700 in non-cash investment vehicles and kept $900 in cash in their HSA brokerage account (see below). HSA account holders with larger account balances held primarily in cash may be missing out on an opportunity to invest HSA dollars in vehicles aligned with their general retirement strategy. Average Account Balance in Thousands $25 $20 $15 $10 $$5 0 Account Balances of HSA Account Holders Who Invest Beyond Cash in Their Brokerage Accounts (by HSA Market Segments as of December 31, 2012) $4.1 $15.6 Cash-Only Saver Hybrid Spender Overall Invested $2.7 $9.9 $0.9 $7.7 $2.2 $11.8 p. 10

11 Many employees are contributing to both an HSA and a 401(k) plan and taking positive action to improve their retirement readiness. Summary Evidence continues to build that HSAs and DC retirement savings plans can complement each other, rather than compete for a fixed allocation of employee savings. In Fidelity s analysis of workplace savings plan data, contributions to HSAs have been shown to correlate with higher DC retirement plan savings rates. Although once viewed by some as an account for the wealthy, HSAs are finding broader appeal to a wide range of ages and incomes. Generally speaking, employees who save money to an HSA save more to their DC plans and have higher DC balances. This generally holds true across different age and income groups. There is certainly good news overall: Many employees are contributing to both an HSA and a 401(k) plan and taking positive action to improve their retirement readiness. To best take advantage of this truly symbiotic relationship more work is needed for employees to better understand and fully take advantage of the HSA s potential. Additional HSA plan sponsor resources available on HSAs and the Coming Cadillac Tax HDHPs and HSAs 101 HSA Employee Communications Best Practices Demystifying HSAs (Highlights from Consumer Research) Three Healthy Habits for HSAs HSAs Continue to Flourish Nearly 15.5 million Americans are now covered by HSA-eligible health plans, an increase of nearly 15% since 2012, according to America s Health Insurance Plans* (AHIP). While many employers are enthusiastic about the concept of empowering employees to play a greater role planning for health care expenditures, they also have concerns about whether employees are prepared for that challenge. Evidence continues to build that HSAs and DC retirement savings plans can complement each other, rather than compete for a fixed allocation of employee savings. Employers and employees can collaborate to help each other satisfy both the need for short-term savings and long-term financial security. *Source: 2013 AHIP Census of Insurance Carriers: p. 11

12 Check out related content on HSAs and Best Practices for Employee Communications on the Fidelity Forum ( Key Considerations for Plan Sponsors In an era of rising health care costs and declining retiree medical benefits, employers should give employees as many savings options as possible. Investigate the option of adding an HDHP with an HSA to your health plan lineup in time for next year s Annual Enrollment. HDHPs and HSAs offer an opportunity for employers to spend less on employee benefits and for employees to spend less on health care coverage. In addition, the HSA offers an attractive long-term savings vehicle, especially to help pay for post-retirement, qualified medical expenses. Employees who are the best savers tend to take advantage of all savings opportunities. These HSA Savers are much better at accumulating DC assets as well. Encourage your employees to become Super Savers in an effort to help boost retirement readiness across your workforce. 1 Analysis of Fidelity HSA and defined contribution participant data January 1, 2010 through January 31, From 1997 and 2011, the percentage of private sector workers offered retiree medical coverage dropped by approximately 40 percent (28.9 to 17.7 percent for early retirees; 25.4 to 15.9 percent for Medicare retirees. EBRI, Fronstin, 2012, Figure 3, 3 Note: All information and charts herein are based on Fidelity data and analysis of 121,000 Fidelity HSAs and DC recordkept data as of December 31, 2012, unless otherwise noted. 4 The HSA research study was conducted on behalf of Fidelity Investments by GfK Public Affairs & Corporate Communications from February 4 20, 2013, using GfK s online KnowledgePanel. The study was conducted among a nationally representative sample of 1,836 U.S. adults between the ages of 25 to 62, with a household income of $25,000 or more, who have primary or shared responsibility for household financial decisions and receive healthcare benefits through their own or a spouse s employer. Of the respondents, 306 self-identified as being enrolled in a high-deductible health insurance plan that allows an HSA, and another 306 self-identified as declining to enroll in the same. For Plan Sponsor, advisor, and institutional use only. Not for use with plan participants. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved