Look out for three common HSA expenses: underlying fund fees, maintenance fees, and investment fees.
In our inaugural report evaluating health savings account plans, we looked at 10 of the largest plans through two separate lenses: as a spending vehicle to cover current medical costs, and as an investment vehicle to save for future medical expenses.
When evaluating HSAs as spending vehicles, we focused primarily on the maintenance fees charged by each plan. When analyzing plans from an investment-vehicle standpoint, we focused on their investment menus and considered three main components to determine an overall assessment: menu design, quality of investments, and price.
We also considered past performance of the funds, though we placed little emphasis on that as we don't believe performance is predictive of future results. One plan would not share its investment menu with us, so we excluded it from the investment-vehicle evaluations.
This article takes an in-depth look at how we evaluated the total cost borne by HSA plan participants who use the plan as an investment vehicle. Ideally, HSA plans offer investment options with attractive expense ratios relative to retail mutual funds while limiting other fees, such as maintenance and investment fees.
Underlying Fund Fees
To evaluate the cost of investing in an HSA plan, we began by assessing underlying fund fees. To make an apples-to-apples comparison across plans, we calculated the average expense ratio of each plan's underlying funds in four broad asset classes: large cap, small cap, foreign large cap, and intermediate-term bond. Exhibit 1 shows the results. We included the median fee charged by similarly managed retail mutual funds to put the expense ratios into perspective. To calculate the average retail fund fee, we used primarily A share classes, which tend to be the most widely owned share classes among retail investors.
With average expense ratios across the four broad asset classes ranging from 0.05% to 0.99%, the plans' underlying fund fees compare favorably versus retail mutual fund peers'. However, HSA plans tack on additional fees that investors must take into consideration.
Maintenance and Investment Fees
Most plans charge maintenance fees to cover general administrative costs. Moreover, the majority of plans charge an investment fee to participants who invest in the mutual fund lineup. Maintenance and investment fees are typically dollar-based fees. To incorporate these expenses into our analysis, we converted dollar-based fees to percentage terms, assuming an account balance of $15,000, which was the average balance in HSA accounts that had investment assets as of year-end 2016, according to Devenir Research's 2016 Year-End HSA Market Statistics & Trends. Exhibit 2 shows the additional fees charged by each plan, as well as the equivalent expense ratio assuming a $15,000 balance.