PLANSPONSOR - October/November 2018 - 28

Upfront
Selecting an HSA Investment Lineup
HEALTH savings accounts (HSAs) have
been used largely like checking accounts,
so cash is the largest component of most
HSAs, says Jamie Greenleaf, lead adviser/
principal at Cafaro Greenleaf.
HSAs with investments have been
using brokerage accounts, or the HSA
provider offers a lineup of mutual funds,
but most do not even have an investment
component, she said. This will change,
as, traditionally, health care brokers have
been driving plan sponsor adoption of
HSAs, but, in the future, advisers will,
Greenleaf says.
According to Kevin M. Murphy, head
of defined contribution (DC) strategic
accounts at Franklin Templeton, HSAs
are where 401(k)s were 30 years ago. " The
evolution of HSAs, specifically to investment
menus, will look a lot like 401(k)s
but will be faster, " he says.
Go Back to the Basics
Greenleaf says the investment lineup for
HSAs should " go back to the basics, " to
be easy to understand-as investments
in 401(k)s were in the beginning: fixed
income, equity, balanced and cash.
Franklin Templeton thinks of
HSA participants in three categories:
spenders, savers and investors, Murphy
says. For example, Millennials have
lower health care costs, so they can max
out their savings. However, he says, all
HSA holders really fall into all three
categories-some cash is needed for
health care expenses today, some needs
to be saved for emergencies, and some
should be invested for the future. " Think
model portfolios, but more conservative
than what we're used to-instead of 60%
equity and 40% fixed income, more like
15/85, " he says.
While it seems that the simplest
investment lineup solution would be to
mirror that of a plan sponsor's defined
contribution (DC) plan, Greenleaf says
what the lineup is solving for is different,
so it should be different than the DC plan's.
She says HSA investing should be more
like defined benefit (DB) plan investing.
" Each year, participants will have a liability,
so they should invest as such, " she says.
What happens when the economy is not
" Think model
portfolios,
but more
conservative
than what we're
used to-instead
of 60% equity
and 40% fixed
income, more
like 15/85 ... "
in a bull market, when an employee goes
to pay a health care expense and has 30%
less than he thought? " She agrees that
plan sponsors should think about model
portfolios and says it should be easy for
employees to check whether they want
short term, medium term or long term.
Still, Murphy says, there is a long way
to go for investment options for HSAs.
But he sees innovation on the horizon for
guaranteed solutions.
Meanwhile, plan sponsors, participants
and providers should think of HSAs
as decumulation vehicles not accumulation
vehicles, says Greenleaf. " It's as if the
participant is age 65 every day. "
According to Greenleaf, products
now being addressed for DC plans will
be used for HSAs. Insurance carriers will
become creative and put together guaranteed
products for HSAs, and participants
28 PLANSPONSOR.com October-November 2018
will be willing to pay a certain fee for a
guarantee. Market risk, inflation risk and
sequence of returns risk can wipe a portfolio
out, she notes.
Rules of Prudence
Although HSAs are not Employee
Retirement Income Security Act (ERISA)
plans, it is probably best practice to follow
ERISA's rules of prudence when selecting
investments, Murphy says.
Greenleaf provides an example: The
HSA investment market currently is
retail-based, so employees will pay retail
pricing. Plan sponsors should look for
providers that can access institutional
investments and institutional pricing.
" I would prepare for HSAs to get the
notice of legislators and regulators, as well
as the plaintiffs' bar if growth continues,
so I would act like a fiduciary, " Murphy
says. " Document decisions like you do
with DC plans, and apply lessons learned
from administration of DC plans. "
Further, participants should be
educated about the investment lineup.
Greenleaf says participants should be
told about the risks so they will not make
the wrong investment decisions. Plan
sponsors should look for a provider that
will communicate with employees. " The
worst thing you can do as an employer
is have an investment lineup, but the
investment manager has no communication
with participants, and participants
have no place to turn for tools or guidance, "
she observes.
She says the conversation about HSAs
is easier than conversations about retirement
plans. " Retirement is so far away, and
health affects [participants] every month
as they pay premiums, so they want to be
engaged, " she says. If the right education
is continuously rolled out, the more likely
that participants will be engaged and open
to talking about proper investments for
their HSAs, she adds. -Rebecca Moore
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PLANSPONSOR - October/November 2018

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