A fresh look at future savings
American 401(k) plans are now more than 20 years old, and these individual retirement accounts have survived both the Enron scandal and the stock market crash. Now the market may be ready for some fresh initiatives: health savings accounts (HSAs) and 401(k) credit cards are two of the newest businesses US money management firms are working on.
HSAs were introduced by the Bush administration one year ago, along with the Medicare overhaul. Already one million Americans own them while more companies, among them General Motors, Wal-Mart, Intel and Textron, are either thinking about or actually are offering them. Bush’s second term can only reinforce their role. A HSA allows people to put aside money tax-free for medical needs much as individual retirement accounts or 401(k) plans do.
A HSA must be used with a high deductible health plan (HDHP), which is a health insurance plan with low premiums but high minimum deductible (what the insured must pay before the policy kicks in): the idea is that the money saved with low premiums can be invested in a HSA.
In fact annual contributions pile up into the account, because the money that is not spent - due to good health - rolls over year on year, until the owner turns 65 when they are covered by Medicare (the public system). Then, the savings accumulated can be freely used: if they pay for extra health expenses, it comes out of the account tax free, otherwise they are taxable.
The Treasury has recently issued guidelines about investments allowed for HSAs. Money can be put in any product already approved for individual retirement accounts (IRAs), such as bank accounts, annuities, stocks, mutual funds, bonds and real estate. It’s a big new market for banks, insurance companies and asset management groups. Aetna, UnitedHealth Group, WellPoint Health Networks and Cigna are among the insurers that already offer the accounts to customers.
Banks managing health savings accounts include JPMorgan Chase, Webster Financial and Ascent Assurance, an affiliate of Credit Suisse First Boston. The mutual fund giant Fidelity is planning to introduce its own HSAs, perhaps as early as next year. There are also independent providers like Health Saving Accounts Investments, which offers 15 Vanguard’s no-load mutual funds to HSA holders, and manages all the administrative side of the accounts.
Another innovation is a new kind of credit card linked to 401(k) plans that could enhance workers’ participation in these retirement accounts. The product could appeal especially to younger people, who currently may be reluctant to lock away for decades their savings while planning big purchases like a car or a house. At least that is what Francis Vitagliano, a professional in the pension compliance field, based in Boston, believes.
Many years ago he patented the ‘401(k) credit card’ with Nobel laureate Franco Modigliani, who in 1985 won the prize for his economic studies about life-cycles of spending and saving. Now workers can apply to borrow some of the tax-deferred money from their 401(k) plans for the purchase of a principal residence or education, or large medical expense.
For years Vitagliano has been trying to convince banks and credit card companies to adopt the idea. But he has faced strong political opposition by people concerned that Americans already save too little and have too many debts. According to David Certner, director of federal policy for AARP, a nonprofit organisation for the over 50s, the new credit card would send the wrong message about retirement savings, and would lead people to deplete their 401(k) plans. In response, Vitagliano proposes a $10,000 (e7,769) maximum (or 40% of the money in the account) on what can be borrowed.
After an aborted attempt by Banc One, ING’s US Institutional Financial Services is currently exploring the feasibility of Vitagliano’s idea. “But as a company,” explains ING’s Caroline Campbell, “we have not reached a definitive conclusion with respect to the theory of how a credit-card like instrument may or may not enhance 401(k) participation.”
Before the product really reaches the market, the discussion will go on between critics and supporters. Among the latter Vitagliano hopes to count on Lawrence Summers, president of Harvard University and former secretary of the treasury, who said to the Washington Post that he likes Modigliani’s idea: “Anything that encourages individuals to establish separate accounts for their saving is likely to increase personal saving and preparation for retirement.”