HSA Holders Looking to Invest, But What Will They Find?

Although investment menu designs are better, there are still improvements that can be made and items plan sponsors should evaluate when selecting an HSA provider.

Health savings accounts (HSAs) continue to offer better tax advantages than 401(k)s and 403(b)s, individual retirement accounts, and 529s, making them a valuable tool to boost retirement savings, concludes Morningstar’s 2019 Health Savings Account Landscape report.

A separate report, the 2019 Alegeus HSA Participant Profile, indicates that while only 13% of HSA participants say they invest their HSA dollars for growth, 58% say they may start doing so. More than one-quarter (28%) report they prioritize saving for future health care expenses, 38% contribute more to their accounts now than in previous years, and more than half (54%) say their account balance is growing.

These are signs that HSA participants are beginning to wake up to the importance of saving for the future, according to Alegeus.

Morningstar’s analysis found fees have decreased for HSA investments, but they vary drastically. Across the 10 investment providers it analyzed, the average cost for the cheapest passive 60/40 portfolio ranges from 0.02% to 0.69% per year.

Morningstar also says the quality of investments across HSA providers remains strong and improved for the second year in a row. At each of the 10 providers it evaluated, at least 80% of the investment options to which it assigns Morningstar Analyst Ratings earn Morningstar Medals of Gold, Silver, or Bronze.

However, although investment menu designs have improved since last year, overlapping investment options and hard-to-use, niche strategies remain present in most HSA investment menus. In addition, seven of the 10 investment providers require investors to keep $1,000 or $2,000 in a checking account before they can invest, which can create an opportunity cost.

When evaluating an HSA provider, Morningstar suggests:

  • Health savings accounts used as spending accounts should avoid account maintenance fees, limit additional fees, offer reasonable interest on deposits, and provide FDIC insurance.
  • Health savings accounts used as investing accounts should charge low fees for both active and passive strategies, offer strong investment strategies in all core asset classes, limit overlap among investment options, and avoid investment thresholds that require investors to keep money in the checking account before they can invest.

Alegeus says an optimized health care savings strategy will include both a defined contribution (DC) retirement plan and an HSA. It recommends participants first contribute enough to a DC plan and HSA to receive all employer matching dollars, then maximize contributions to an HSA and turn to contributing up the IRS limit for DC plans.