Why Fidelity Is Our Favorite HSA in 2 Charts

Editor's Note: We have published new research and enhanced our methodology. Read our evaluation of the best HSA providers of 2022.

We're in the heart of open-enrollment season, and you might find yourself looking for a health savings account. Well, look no further. We published a report in October that ranked 11 top HSA providers, and the conclusion is clear: Pick Fidelity's HSA.

A Quick Recap on HSAs
HSAs offer unrivaled tax benefits and, as long as you're in what the IRS considers to be a high-deductible health plan--which is mostly defined as plans with a deductible of at least $1,350 for individuals and $2,700 for families--you should use one if you expect to have medical costs now or any time in the future. So, basically anyone in a high-deductible health plan. HSAs are the most efficient way to pay for medical expenses. Money goes in tax-free, it grows tax-free, and you withdraw it tax-free as long as it's spent on qualified medical expenses.

Because of the tax-free growth, the savviest strategy to maximize your net worth over time is to invest and grow your HSA dollars to pay for future medical costs, which are likely to be significant. (Fidelity estimates that couples on average spend almost $300,000 on healthcare in retirement. That number excludes long-term care expenses, but individuals can use HSAs to cover long-term care insurance premiums.) If you wind up not needing your HSA dollars for healthcare (lucky you), once you turn 65, withdrawals are treated like a 401(k)--they're taxed on the way out. So, that's still a good outcome.

We realize not everyone has the means to invest their HSA assets; some people might need to use those dollars on healthcare expenses they're incurring now. Because HSA contributions skip out on income, Medicare, and Social Security taxes, HSAs still offer great value for individuals who intend to spend that money now.

Given the different use cases, our study ranked HSAs from two perspectives: As a spending account to cover current medical expenses, and as an investing account to save for future medical expenses. Below, we illustrate why Fidelity is the best option for both uses cases in two charts.

HSA Spending-Account Rankings
HSA spenders have two main considerations: the maintenance fees charged by the HSA provider and the interest rate earned on money in the HSA checking account. Of the 11 providers we evaluated, Fidelity is one of three that don't charge a maintenance fee. The other eight charge maintenance fees ranging from $30 to $45 per year. Fidelity also offers the best interest rate: It yields 1.07% regardless of account size. Interest rates at the other providers vary depending on account size, but none of them rival what Fidelity offers. For instance, the average HSA account holder has a $2,000 balance; at that level, the next-best provider yields a paltry 0.25%.

Exhibit 1 illustrates why Fidelity is an obvious choice for HSA spenders. It combines the effects of maintenance fees and interest rates, subtracting the annual fee you'd pay and adding the annual interest you’d earn at account balances ranging from $1 to $10,000. Fidelity wins by a landslide at all balances. For instance, if you have $5,000 in your HSA, that balance would grow by $54 per year at Fidelity; at the next-best provider, it would grow by $15, and at the worst provider, you'd lose $41.

HSA Investing-Account Rankings
For those looking to invest their HSA dollars, Fidelity again rises to the top. When evaluating HSAs from an investing standpoint, we considered five components, including the investment menu design, investment quality, price, performance, and investment thresholds. Our report elaborates on our methodology, but Exhibit 2 largely summarizes why Fidelity is a tier above all others. It shows the total cost of investing in a passively managed, globally diversified 60% stock/40% bond portfolio at each HSA provider at various account balances. Investors can buy that portfolio at Fidelity for an all-in cost of 0.02% regardless of account size. Fees for an essentially identical portfolio at the other providers vary depending on account assets. If you have a $5,000 balance, their fees range from 0.39% to 1.48%. If you have a $50,000 balance, their fees range from 0.11% to 0.41%. Overall, Fidelity's significant cost advantage versus peers will add up over time and lead to meaningfully higher savings for its investors.

Fees fall as assets grow at all providers except Fidelity because they charge dollar-based fees. Exhibit 2 converts those dollar-based fees--which become less meaningful on a relative basis as account assets grow--into percentage terms, which leads to a declining expense ratio.

The total fees shown in Exhibit 2 include three potential fees that HSA investors will encounter: maintenance fees, investment fees charged for the privilege to invest, and underlying fund fees. We already mentioned that Fidelity doesn't charge a maintenance fee. It's also one of two providers that don't charge an investment fee and the only provider that doesn't charge either. The only fee Fidelity charges is underlying fund fees. Fortunately, Fidelity has some extremely inexpensive investment offerings that allow individuals to build a well-diversified portfolio for a total cost of 0.02%, as shown above.

What About Your Employer's HSA?
We evaluated HSAs from the perspective of an individual who is shopping for an HSA on his own as opposed to using one offered by his employer. If your employer offers an HSA, give it a close look. Sometimes employers cover fees that you'd have to pay if you bought the HSA on your own. Plus, your employer HSA will conveniently deduct tax-free contributions from your paycheck, and your employer might even contribute to your HSA if you select its offering.

If you aren't happy with your employer's HSA but you still want to take advantage of its HSA contribution (as you should, if it's offered), there is a work-around for that. You can own two HSAs side by side, meaning you can make regular contributions to your employer HSA, receive your employer's contribution into that account, and then regularly shift those assets to an HSA of your choosing. Because Fidelity essentially offers its HSA free of charge, it likely stacks up well versus your employer plan. It might be an operational headache to constantly shift dollars from one HSA to another, but the cost savings could be worth it.

Note: We excluded Lively from our investing-account evaluations because the firm doesn't offer an investment menu, it only has a brokerage window.