Depending on the source of information, there are 300 to 400 HSA providers in America; some even say there are as many as 2,000 if you count banks that offer their own demand deposit accounts (checking accounts) that pay a small rate of interest to HSA holders. In this market, many banks derive transaction-based revenue, which comes from debit card transaction fees, the spread earned on cash in the accounts of HSA holders, as well as any float income earned on cash held.
Advisors need to partner with the right HSA provider. To me, that means those that can provide the following.
- The flexibility of an open architecture investment platform enabling customization of investment option menus (these menus should include a broad array of low cost, and broadly and deeply diversified investment options of index funds and assets class funds);
- A proprietary, web-based, high quality 401(k) record-keeping system comprising the total underlying platform;
- Active assistance with the on-boarding of HSA holders and the servicing of them, thereby helping make HSA administration easy and profitable;
- Personnel that think and act like advisors, and who have a 401(k) investment and operational background; and
- First dollar investing (that is, HSA holders do not need to deposit some minimum of amount of cash–say, $2,000–before they can begin investing but instead can begin to invest from dollar one).
Conflicts of Interest?
Can advisors looking to enter the HSA market and grow assets under management get paid for doing so only if they get clients invested in mutual funds and ETFs, but not expect to get paid on bank accounts/cash accounts/cash equivalent accounts? If so, this implies that an advisor gets paid only on invested balances instead of total HSA assets (including cash). And that may be a conflict of interest, even though many may think it wrong to charge a fee on assets that include cash.There is an argument to be made that depending on an employee’s deductible, discretionary income, and other factors, it might actually be prudent for an advisor to advise the employee to keep a higher cash balance on hand than they would otherwise normally recommend. Is this type of asset allocation advice on cash not advice that an advisor should be paid for? Compensating advisors only on invested assets also incentivizes advisors to have employees invest all their assets, which may not necessarily be prudent depending on the combined market risk and deductible risk in relation to their discretionary income. Updates
Last month I failed to give credit to Devenir as the source of the statistics cited. A reader of my January column wrote:
“Great post, and really interesting analysis on how valuable the FICA savings proves over long time periods. One item I disagree with is the example you use of the worker who doesn’t realize he was HSA eligible until tax filing. You can’t take a tax-free reimbursement for a medical expense incurred before your HSA is established.”
The reader is quite right, and I didn’t mean to imply otherwise. Another reader wrote:
“I read your recent article about the HSA vs. the 401(k) and really liked the article–I am a firm believer in the HSA…[But aren’t] the tax implications for non-spouse beneficiaries of an HSA worse than inheriting a 401(k)? Your article seemed to say otherwise.”
This reader is also quite right, and I didn’t mean to imply otherwise. If an HSA holder dies, a spouse designated beneficiary assumes ownership of the HSA and can use it for qualified medical expenses just as if it was their own HSA. But if the designated beneficiary is not a spouse, the HSA is not treated as an HSA. In that event, the assets become part of the HSA holder’s estate or they go to any nonspouse designated beneficiaries. In either case, they are subject to any applicable taxes.W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. For more information, visit Prudent Investor Advisors, or e-mail at firstname.lastname@example.org
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