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Defined Contribution

DC community targets HSAs, student loans and ESG funds at PSCA conference

When offering health savings accounts, defined contribution plan sponsors find that education is both the biggest challenge and the most important element in explaining the health, investment and tax value of these options, according to speakers at the Plan Sponsor Council of America's national conference in Tampa, Fla. April 29-May 1.

HSAs were part of a wellness theme that permeated the conference as speakers discussed how health care, student loans and specific financial needs of different demographic groups play an important role in preparing for retirement.

A just-completed PSCA survey showed the biggest concern for sponsors offering HSAs is employee education. Among the respondents, 61% cited employee education as their primary concern compared to 16% mentioning difficulty of administration — the next biggest concern. The percentages of respondents citing compliance, investment options, fiduciary liability and "other" as their primary concerns were each in single digits. The results were presented at the conference May 1.

HSAs are offered through high-deductible health plans. Among the 216 respondents, 189 offered HSAs in 2018, eight will offer HSAs this year and 19 don't offer HSAs.

One big issue among sponsors is that participants still confuse HSAs with flexible spending accounts, said Kenneth Forsythe, head of product strategy for Empower Retirement. His company sponsored the PSCA survey along with Optum Bank, a provider of HSAs and other medical spending accounts.

The survey data said 76% of plans primarily offer HSA education during open enrollment, while 21% offer education several times during the year. The most popular education strategies are group presentations, HSA "how-to" guides and printed fliers, according to the results discussed at a panel discussion titled "State of the Union for Health and Wealth."

Mr. Forsythe encouraged PSCA members to emphasize the link between HSAs and retirement investing opportunities. "You want to make sure you don't leave money on the table," he said.

Mr. Forsythe described a "retirement savings optimization model" for participants using HSAs as a potential investment vehicle.

If employers offer a match for a 401(k) plan, participants should put in enough money to maximize the match, he said. Then, contribute the maximum amount to the HSA. If participants have additional funds, they can put more into the 401(k), he said.

For participants in retirement plans that lack a company match, maximize the HSA contribution first, then put additional funds into the DC plan, he said.

For HSAs offering investment options, the survey found that 43% required participants to have an account balance of more than $1,000 before they can invest. Another 33% set the threshold at $1,000, while 24% had a limit of less than $1,000 or no limit.

Mr. Forsythe suggested that plans require some threshold in their HSAs so participants can guard against unanticipated medical expenses.

Atrium Health requires participants to have at least $1,000 in their HSA accounts before they start investing, Mercedes Ikard, the company's director of retirement planning, said during a panel discussion called "Health Savings Accounts: Retirement Superhero in Disguise."

Among the company's 28,000 HSA participants, 1,000 use their HSA accounts for investing as well as paying medical expenses as of Dec. 31, she said. The number of investors has increased steadily, more than tripling since Dec. 31, 2016.

To help participants understand the investment opportunities and tax benefits of HSAs, "communicate often and make it as simple as possible," she said. "Use as many communications channels as you can."

For Atrium Health, that means a microsite, emails, the social networking site Yammer and printed materials. The latter is used not only for current employees but also for prospective ones, she explained.

The company's education effort focuses not only on describing the tax advantages of HSAs but also asking participants to assess their risk tolerance for their accounts — how to balance their comfort with potential investment losses and their understanding of unexpected health-care expenses.

HSAs provide a triple-tax advantage for workers who participate in high-deductible health plans. Contributions are made with pretax dollars; investment gains within HSAs are tax free; and withdrawals from HSAs are tax free for qualified medical expenses.

As HSA investing proceeds slowly, attendees learned that another investment opportunity — ESG funds — is not getting the big welcome they anticipated in defined contribution plans.

"I personally haven't seen a lot of ESG added to lineups," said Renee Gallagher, vice president of institutional services at Comerica Bank, during a panel on plan lineup simplification. She and other panelists described ESG funds as "evolving" and noted the lack of quality funds with long-term track records, factors that prevented sponsors from offering them.

Brandon Diersch, group portfolio manager at Microsoft Corp., said the company has not added ESG funds to its core lineup and that it directs participants interested in the funds to "go to the brokerage window," which has 700 ESG funds on the platform.

"They can pick whichever strategy fits their individuals needs on that platform," Mr. Diersch said.

Dennis Scarpa, a consultant and research analyst with Fiduciary Investment Advisors, was also skittish about giving ESG funds a home in defined contribution plans. Adding them was contrary to the general desire among plan sponsors to "slim down menus," he said.

"If you're adding ESG or (socially responsible investing) funds to the menu, participants are going to ask for other things too," he said. "Where does it stop?"

Sponsors appeared to be a little more eager to please participants with student loans. Many would like to take a page from Abbott Laboratories' playbook and make employer contributions to the 401(k) accounts of participants paying down college loans. However, lack of guidance from the IRS is preventing many companies from moving ahead with plans to link 401(k) employer matches to student loans, said two attorneys — Jeffrey M. Holdvogt of McDermott Will & Emery and David Levine of Groom Law Group.

Since Abbott Laboratories received a private letter ruling from the IRS last summer to link the two, the industry has been clamoring for guidance, which it is unlikely to receive, according to Messrs. Holdvogt and Levine.

"The IRS at this point isn't jumping to go issue a revenue ruling," said Mr. Levine during a session on student loan developments for 401(k) plans.

Even though the IRS "is not enthused" about getting more requests for private letter rulings, it nevertheless is not "leaning toward" issuing guidance, Mr. Levine said.

"The IRS is a little bit between a rock and a hard place," said Mr. Holdvogt. While the agency doesn't want to be in a position to issue more private letter rulings, it is also "very wary of some of the unintended consequences," he said.

Plan sponsor focus on student loans appears to be warranted given the weak financial situation of millennials, the most financially fragile group of all the generations, according to two actuaries who presented a study sponsored by the Society of Actuaries.

"Millennials are struggling as a group to establish themselves financially," said Anna Rappaport, president of Anna Rappaport Consulting. She said 26% of millennials registered high levels of financial fragility, the most of any generation.

"Millennials are focused on paying off student loans and getting into a home-buying situation," said Carol Bogosian, president of CAB Consulting. "They're more likely to feel overwhelmed."

The study canvassed about 400 individuals from each of the following generations: millennials, Generation X, early boomer, late boomer and the preceding "silents" generation.