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Advisors, Want To Improve Client Retention Rates? Consider The HSA

Advisors, Want To Improve Client Retention Rates? Consider The HSA


According to research from PriceMetrix, over 60% of the households who worked with financial advisors in 2017 had multiple accounts with their advisors. In addition, 70% of those households had a retirement account with their advisors, a 6% increase since 2014.

Also, PriceMetrix research from 2014 found that for advisors, the number of retirement accounts their clients owned had a significant impact on retention rates. While households with zero or one retirement accounts had similar annual retention rates around 0.85 (meaning 85 out of 100 clients would stay with their advisors in the following year), households with two or more retirement accounts had a 0.94 retention rate. That’s a 10% increase in annual client retention from adding an additional retirement account.

For advisors, the more retirement accounts your clients open, the more likely you are to keep those clients around longer. However, if your clients are already funding 401(k)s and/or IRAs, they may not see the value of another retirement savings vehicle. Enter the health savings account (HSA). Because HSAs are dedicated savings vehicles for medical expenses, they provide a specific solution other retirement accounts can’t match. When you consider their unparalleled tax benefits, HSA are an invaluable piece in a comprehensive retirement strategy.

What Are HSAs’ Tax Benefits, And Who Can Have One?

Traditional 401(k)s and IRAs are only taxed when funds are withdrawn, while Roth 401(k)s and IRAs only are taxed when funds are contributed. However, when used for qualified medical expenses, HSA funds aren’t taxed when they’re contributed or when they’re withdrawn (and earnings and interest grow tax-free too). This triple tax benefit makes HSAs the undisputed champion for saving for healthcare costs, whether in the near future or in retirement.

Not everyone can contribute to an HSA; the IRS requires contributors to be covered under HSA-qualified health plans (HSAQPs). These HSAQPs must have a minimum annual deductible above a certain point, and they can’t cover any non-preventive medical care until that deductible is reached. In addition, individuals can’t make HSA contributions if they’re enrolled in Medicare or covered by an FSA, among other things. Read the full HSA eligibility requirements here.

Why Should People Use HSAs For Retirement Medical Costs?

Often, HSAs are treated simply as FSAs with no use-it-or-lose-it restrictions, and accountholders only use their funds to pay for current healthcare expenses. However, by investing their funds instead of spending them, accountholders can build medical nest eggs to pay for retirement healthcare costs tax-free. And as a bonus, this frees up 401(k) or IRA funds for non-medical expenses.

The average couple retiring in 2018 at age 65 will be liable for over $400,000 of non-Medicare-covered medical expenses, according to Healthview. Investment HSAs allow accountholders to pay for that $400,000 in healthcare costs tax-free, instead of forking out up to $130,000 more in taxes with 401(k) or IRA funds. Tell your clients you can put $130,000 back into their 401(k) or IRAs, and you’ll probably get an eager response.

How To Talk About HSAs With Clients

A good way to see whether an HSA is a good fit for a client is gauging how prepared they feel for impending healthcare costs in retirement. Do they feel confident? Is their confidence based on an accurate knowledge of the true cost of healthcare in retirement? If they aren’t sure how much their retirement medical expenses will be or don’t have a solid plan in place to cover them, bringing up HSAs is the right next step.

Even if a client has heard of an HSA, don’t assume they understand all the details; they may not understand HSAs’ unique tax benefits. In addition, make sure clients know that accountholders can withdraw HSA funds for non-qualified costs after age 65 and just pay regular income taxes, like they would with 401(k) funds. Basically, HSAs turn into 401(k)s or IRAs after accountholders turn 65, except qualified medical expenses are tax-free and there is no required minimum distribution.

Also, make sure clients understand that HSAs can be invested long-term. Less than 20% of all HSA funds are invested, and while some of this might be due to intentional choices, it’s likely some accountholders simply don’t know they can invest their funds. Make sure to bring up how HSAs aren’t just for current healthcare costs but can be grown to pay for medical expenses in retirement.

As a uniquely tax-advantaged account specifically tailored for medical expenses, HSAs can fill a gap in many clients’ retirement plans. By adding HSAs to their clients’ portfolios, advisors can help their clients create more financially secure retirements and increase client lifespan and retention rates.

Advisors, if you don’t currently have an HSA in your retirement toolbox, we’d love to get you started. We can provide the content you need to speak knowledgably about HSAs with clients, as well as provide you with a superior HSA product. Learn more about our approach here.

Author: James Denison