The Best HSAs for Investing
We size up health savings accounts' menu design, underlying investments, and total cost of investing.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The tax benefits of health savings accounts are undeniable, but how good are they from an investment standpoint? Joining me to discuss some recent research on this topic is Leo Acheson, he is a senior analyst in Morningstar's manager research group.
Leo, thank you so much for being here.
Leo Acheson: Of course. Thanks for having me.
Benz: I was really excited to see this research. Morningstar, I think, is a natural researcher in this area. So, let's talk about health savings accounts. The tax benefits are really good. The government really wants us to take advantage of these vehicles. Let's talk about how they work from a tax standpoint.
Acheson: Yeah, that's right. They have a triple tax advantage that's really attractive, which means that the money that you contribute is pre-tax, your money can grow tax-free, and your withdrawals are also tax-free. So, essentially, as long as your money is spent on qualified medical expenses, it's never taxed.
Benz: One thing you looked at is, you looked at these HSAs from a savings standpoint. So, if I'm covered by a high deductible healthcare plan and I just kind of want to spend as I go, you looked at the vehicles from that standpoint for people who are using them in that way. You also looked at them from an investment standpoint. So, if I say, well, I think I can cover my out-of-pocket healthcare costs on my own, I can leave this money to grow and take advantage of those great tax savings that we've talked about, the tax benefits. You looked at HSAs from both standpoints. What you found is that most of the large HSAs don't do a great job in both areas. They either are good savings vehicles, not so great from an investment standpoint, or great from an investment, not so great from a savings standpoint.
Acheson: That's exactly right. We looked at 10 of the largest HSA providers and in fact, only one of those looked attractive for use as both an investment and a spending vehicle.
Benz: Let's talk about the criteria that you judged HSAs on, especially I want to focus specifically on the investment piece. So, for people who have the wherewithal to pay out-of-pocket, they want to save and invest within the HSA. What are the criteria that you judge the HSAs on?
Acheson: We judge the HSAs from an investment standpoint on three main criteria. That includes the menu design--so essentially, what are the asset classes that are available to investors; the quality of the underlying investments within that menu; as well as the total cost of investing in those options.
Benz: You created some best practices, or when you did this research you thought about, OK, what are some ideal ways for these investment-related HSAs to be set up. What are the best practices you use to judge them on?
Acheson: From an investment standpoint, looking at the menu design, we think that it's important to offer investments in all of the core asset classes that are necessary in order to build a diversified portfolio. In addition, we think it's a good idea to limit overlap among those options. A lot of research has shown that offering too much choice can lead to bad decisions or even decision paralysis. So that explains that criteria.
In addition, we looked at the quality of investments. And what we're really looking for there are funds that are run by skilled portfolio managers with proven processes that we think are likely to outperform going forward. Our team evaluates and assigns forward-looking analyst ratings to thousands of mutual funds. And so, we really leverage that research to get a sense for the quality of the lineups within these plans.
Benz: Expenses are a piece of this. In fact, that's been one of the big knocks on HSAs as investment vehicles, that a lot of them have all these different levels of fees. Let's talk about that and how you looked at the fees within these HSAs.
Acheson: There are three main fees to keep an eye out for when you're looking at these plans. So, one, of course, would be the underlying fund fees of the investments that you're selecting. In addition, there are two other fees that are typically dollar-based fees, including maintenance fees that some plans charge, as well as investment fees that some plans levy in order to access the investment lineup.
Benz: Let's talk about the HSAs that looked best for an investor who wants to use the vehicle for investing.
Acheson: Of the 10 plans that we looked at, four looked the most attractive from an investment standpoint. Those were Optum Bank, Bank of America, The HSA Authority, and HealthEquity. And in fact, of those four, the HealthEquity looked the most attractive because this scored well on all three of the metrics that we looked at, including menu design, quality of investments, and the price.
Benz: We noted, you noted that it's a rare plan that works well as both a savings vehicle and as an investment vehicle. You did find one though that stacked up really well for both types of HSA users.
Acheson: That's right. The HSA Authority does look attractive for use as both spending and investing. On the spending side, they charge no maintenance fees. So, that makes it really attractive. And on the investment side, they have an attractive price as well as some solid, quality investments.
Benz: One question that HSA users often grapple with is if they are in an employer-provided health savings account, are they stuck in it, are they held captive, or do they have some options? Can they take their money and perhaps move it to another HSA that's better?
Acheson: They definitely have options. HSAs are tied to the account-holder. So, account-holders are not captive in their employer's plan. They can shop around for the best one that they think would suit their needs.
Benz: You could use maybe your employer's HSA to send your paycheck through it, and then periodically make transfers into the HSA of your choosing.
Acheson: That's exactly right.
Benz: Leo, great research. Thank you so much for being here to discuss it with us.
Acheson: Of course. Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.