As Eric Remjeske sees it, there's a significant upside to being in a market that's yet to take off -- there's little competition. The downside? It's a market that's yet to take off.
Remjeske heads a small Edina investment house called Devenir that's staking its future on health savings accounts (HSAs). Created by Congress in 2003 as a way for people who had high-deductible health plans to accumulate pretax dollars for medical expenses, HSAs are slowly but surely gaining popularity, with about 6 million Americans enrolled this year.
As the balances in these accounts grow, Remjeske is betting that people will want to start investing some of it in mutual funds.
It's a controversial idea. If you're putting money aside in case you get sick, should you be gambling with it?
And especially in a volatile stock market like today's? Some financial advisers say no, especially for those who don't have a lot socked away. But proponents say that, for those who are affluent enough to build up tens of thousands in medical funds, investing some of it can be a way to make more money while reaping tax advantages.
Building a niche
Devenir is carving a niche in this nascent field. It manages about $100 million of the estimated $150 million in HSA investments nationwide. It has partnered with banks and insurers around the country, including Blue Cross and Blue Shield of Minnesota and OptumHealth Financial Services, part of UnitedHealth Group Inc.
Remjeske acknowledges that it's early days.
"We're like the 401(k) market in the early 1990s," he said. "Or the 529 college market in the mid-1990s."
In other words, ready to grow.
From 401(k) market to HSAs
Five years ago, Remjeske left his job at RBC Dain Rauscher and started Devenir with several former co-workers and Piper Jaffray executives. At the time, their target was the 401(k) market.
But Devenir found itself consistently outbid by the big guys. "It's very difficult to differentiate yourself from a Schwab or Fidelity," said Remjeske, a fresh-scrubbed 36-year-old who has photos of his second baby on his desk.
Devenir soon found its differentiator: HSAs.
Blue Cross was Devenir's first big contract, signed in 2004. But big is, of course, a relative term in the HSA market. Devenir manages $10 million in investments for Blue Cross HSA enrollees.
These days, when Devenir shows up to help bid for HSA contracts from large employers, it's often the investment adviser to multiple bidders, which may be health plans or banks. That's one reason why last year, Devenir tripled its assets under management to about $100 million. It now has five full-time investment professionals.
As with 401(k) plans, the funds are "self-directed," in that Devenir doesn't advise people how aggressive they should be in selecting investments. But the choices tend to include a greater number of conservative funds than is typical for a 401(k).
Last year, Remjeske was named one of 20 rising stars in the retirement investment world by Institutional Investor.
"They're one of the few investment advisers that specialize in HSAs," said Chad Wilkins, chief executive of OptumHealth Financial Services, which has 380,000 HSA accounts, the most in the country. OptumHealth, previously named Exante, has offered Devenir's slate of investments to its clients since 2005.
There are significant tax advantages to HSAs, said Kirk Hoewisch, president of HSA Bank in Sheboygan, Wis., which also works with Devenir. Like an IRA, there's an upfront tax deduction when you put the money in. It's tax-deferred, like an IRA. But unlike an IRA, any money taken out of an HSA after age 65 for medical expenses isn't taxed. (There is a nominal penalty for money taken out before age 65.)
Hoewisch divides HSA enrollees into spenders vs. savers. The savers -- who are also those most likely to invest -- tend to be self-employed and more affluent, he said.
When thinking of retirement investments, Hoewisch said, a 401(k) is best because many employers match the contributions, followed by HSAs, and finally, IRAs.
A growing HSA market
For now, most people are still struggling to understand the basic concept of HSAs for medical spending. The idea of investing is still a ways off.
In recent years, many large employers have started offering HSAs alongside high-deductible plans as one option beside traditional plans. Soon, benefits consultants predict, it could be the only option, as traditional plan premiums get too expensive for employers to shoulder.
A growing number of the self-employed have opted for high-deductible plans with HSAs, as premiums for traditional plans in the individual market become unaffordable to most.
Even then, it will take years to build up balances.
The average unused HSA balance rolled over from 2007 to 2008 at HSA Bank was $2,160, up from $1,734 the previous year, according to Consumer Driven Market Report, a trade publication. Enrollees who have at least $1,000 in cash in the account can invest anything above that.
"Investment accounts are probably going to be big 10 to 15 years from now," said Bill Wixon, public relations director for the 850-member Financial Planning Association of Minnesota.
But for now, "it's just not that big a fish to fry," Wixon said. "When people start accumulating tens of thousands, we are going to ask them to invest it conservatively.
"It'd be sad if you put away that money and pick a real aggressive growth fund and then the markets came and took away 30 percent of that," he said.
Chen May Yee • 612-673-7434