It Pays to Shop Around for HSAs

Last year, I wrote a white paper examining health savings accounts, or HSAs, and the associated challenges and obstacles to optimal usage. One of the challenges I highlighted was that HSA plan structures vary significantly from provider to provider. This column, I take a look at how differences in fee structures have an impact on future balances.

Some HSAs offer lower fees but unappetizing mutual fund lineups and vice versa. Some don't offer investment options at all.

Fortunately, if the HSA available through an employer has especially high fees or offers a suboptimal fund lineup, workers have some recourse. They could set up an HSA outside of their work plan and contribute to that in lieu of their workplace HSA (though they lose out on FICA tax benefits if they earn less than $118,500) or periodically transfer balances from their workplace-sponsored HSA to their own HSA.

The most attractive option for workers who wish to use their HSAs to pay for medical expenses in retirement may be to find an HSA provider that offers a low-fee fund lineup. However, how steep of a price are workers participating in HSAs with suboptimal or expensive funds paying?

Generally, if the lineup offered is composed of chronically underperforming funds, then a higher net wealth can be achieved by seeking out an HSA that offers higher-performing funds.

But assuming negligible differences in fund performance, does the same hold true if a worker is trying to decide between an HSA with low account maintenance and usage fees but relatively expensive funds and an HSA with higher account fees but relatively cheap funds?

To answer this question, I built a model to simulate the fees a worker might expect to pay over a set number of years given varying assumptions, such as account fees and fund fees. In general, workers with longer time horizons will benefit more from access to cheaper funds.

For example, take a worker who wishes to invest her HSA for 20 years and has an HSA with a yearly fee of $60 (i.e., account maintenance fee, usage fees, or some combination thereof) and fund fees of 100 basis points. She might expect to pay about $10,000 in fees over those years.

All other things being equal, if the worker could achieve similar performance for only 50 basis points, she might expect to pay almost half that, or about $5,700 in fees.

This dramatic savings is further illustrated by the fact that in order to pay about $10,000 in fees with 50-basis-point funds, the yearly account fees would have to be about $300. For a longer time horizon, the scales tip even more in favor of lower-fee funds.

The optimal strategy may be to open an HSA with more favorable terms and transfer balances several times per year. However, this assumes that the worker can overcome the behavioral friction associated with opening an HSA outside of his or her workplace-sponsored plan and periodically transfer the balance.

Given that HSAs are relatively new financial instruments, there is a dearth of publicly available survey data about them, and it is difficult to determine the extent to which this happens.

If saddled with an HSA set up by their employer with an underperforming or expensive fund lineup, workers ought to carefully consider shopping around for a better deal.

They may benefit significantly from seeking out an HSA outside of their employer's plan with access to a less expensive fund lineup.

This article appears in the August/September 2016 issue of Morningstar magazine. To subscribe, please call 1-800-384-4000.