An unexpected winner from rising health care costs? Wall Street.
More Americans are setting aside money in health-savings accounts for medical bills that their company plans no longer cover. Money managers are eyeing this new pool of assets as an opportunity.
HSAs are primarily offered by banks and act as checking account-like pools that preserve balances. As they grow, however, some savers are increasingly interested in investments beyond money market funds that could generate greater returns over time. This is a welcome opportunity for asset management firms at a time when they are seeing net 401(k) withdrawals for the first time.
With insurance premiums getting more expensive, more companies are shifting workers onto high-deductible plans. It lightens costs for employers and shrinks the monthly premiums paid by workers. But these plans mean bigger out-of-pocket expenses for doctor’s visits or prescription drugs.
The HSAs are a key feature that accompanies these stripped-down plans. The market for the accounts has doubled since 2012 to end last year with $30.2 billion in assets, according to new data from Devenir Research, an independent investment advisor and consultant. The industry is projected to double in size again by the end of 2018 to $55 billion, Devenir says.
The number of HSA accounts rose 22% to 16.7 million over the past year, Devenir says. That means, for the first time, the number of Americans with HSAs surpassed the 14.7 million current private-sector workers with a traditional pension.
Some asset managers view the HSA market as an opportunity akin to breaking into the 401(k) space in the early 1980s, when it was only a fraction of its current $6.5 trillion size, said Eric Remjeske, Devenir president.
Michael Ponce, vice president and senior sales manager for TD Ameritrade’s self-directed plan services, has seen “dramatic growth” over the past three years, with investors increasingly interested in low-cost stock and bond mutual funds and ETFs for their HSAs.
“People understand that in a 401(k), if they put money aside they get a match. The HSA is hopping on that bandwagon,” with some employers offering annual contribution matches, Mr. Ponce said.
Many people with HSAs currently spend all of the money in those accounts on their more immediate medical bills. But the potential windfall for asset managers is what gets saved up in anticipation of future medical bills. HSA specialists acknowledge that for now, account sizes are small and investment limits mean the accounts are unlikely to rival 401(k)s in size.
“The dollars aren’t as big as 401(k)s, but over time I do believe it is significant,” said Michael Mascolo, employee benefits national practice leader for Wells Fargo Insurance.
The Employee Benefit Research Institute, a think tank, estimates that a 65-year-old man in 2015 who wanted a 90% chance of saving enough to cover his basic health care expenses in retirement would need to save $124,000. A woman the same age would need $140,000.
It’s clear to Paul Fronstin, director of EBRI’s health research and education program, why HSAs have found a broad audience among companies. “There are three reasons: cost, cost and cost,” Mr. Fronstin said.