We've published new research. Read highlights from our latest assessment of HSA providers.
In previous posts, I took a deeper look at health savings accounts as spending vehicles and how we assessed the 10 largest HSA providers. Now, I’ll focus on the investment side of HSAs and how we determined the best HSA investment accounts.
HSAs offer unique tax advantages
HSAs feature tax-free contributions and tax-free withdrawals for medical expenses. And much like a 401(k), they also offer tax-free growth on investments. With HSAs, accountholders can reimburse themselves for medical expenses they incurred and paid for out of pocket many years later.
For accountholders who can pay out of pocket for their current medical expenses, investing their HSA funds may be the best option. These accountholders can leverage compounding returns, which may allow them to achieve a greater net wealth than they otherwise would have if they had used the accounts to pay for their current medical expenses.
This strategy works for people who have sufficient emergency savings and can weather both planned and unplanned medical expenses.
HSAs can help accountholders prepare for retirement
A study by Fidelity estimated that retired couples can expect to pay more than $260,000 on healthcare in retirement, and even more if they insure against long-term care. Funds from HSAs can be used for paying Medicare premiums, and this can be an effective strategy for paying for long term end of life care.
Of course, it’s likely that a relatively small slice of the population will use the investment approach, as it requires significant savings to cover medical expenses out of pocket. Indeed, research has indicated that few accountholders pursue this option. In an analysis I performed several years ago, I found that only 5% of eligible accountholders invested their HSA funds. The Employee Benefit Research Institute found a similarly small number, just 3%, in the database of HSAs they maintain.
4 factors we used to determine the best HSA investment accounts
- Menu design. Providing a well-crafted fund lineup is important, as too few choices can lead to gaps that don’t adequately serve investment strategies, and too many redundant and overlapping choices can lead to decision paralysis. SelectAccount, Bank of America, HSA Bank, and Health Equity earn positive marks for their menu designs, all of which cover a variety of investing strategies without too much overlap. HealthSavings Administrators and Alliant Credit Union earned negative assessments for offering an overwhelming number of investment options, where investors must comb through a whopping 494 and 125 funds, respectively, to build their portfolios.
- Investment quality using Morningstar Analyst Ratings™. We subtracted the percentage of funds that received Gold, Silver, or Bronze ratings by the percentage that received Neutral or Negative ratings. If the result was over 50%, then the HSA received a positive assessment. To earn a negative assessment, a fund would have to be comprised mostly of negative-rated funds. None of the plans we studied did so. Health Equity, Optum Bank, The HSA Authority, and BenefitWallet all received positive assessments for their investment quality scores; the rest received neutral assessments.
- Price. The cost of the underlying funds is an important consideration, but so are the fees charged by the HSA for the ability to invest. Some accounts charged a flat fee for the ability to invest HSA funds, while others charged a percentage of assets. Prospective HSA investors should consider both when choosing their plan. We considered a hypothetical HSA investor with $15,000 in assets, which is about average for accountholders who invest their HSA assets. We calculated the cost of the underlying funds, plus the fees HSA providers charge on top of that, and compared that to the median retail fund fee. Health Equity, Optum Bank, The HSA Authority, and Bank of America were relatively cheaper than retail mutual fund fees and earned positive assessments on price, while the offerings from BenefitWallet, HSA Bank, and Alliant Credit Union were relatively more expensive and earned negative assessments. It’s important to note, though, that for larger balances, the fees charged by HSA providers for the ability to invest matter somewhat less, because many of the fees are dollar-based rather than fixed expense ratios.
- Performance. We looked to see if fund lineups had produced strong results in the past and were well-positioned to continue posting positive results. Analyzing the average Morningstar Rating TM for funds, we found the HSA Authority, HealthEquity, Optum Bank, HealthSavings Administrators, Bank of America, and BenefitWallet all fared well and earned positive assessments. We didn’t assign performance much weight in overall ratings, though, as past performance is not particularly indicative of future performance.
The best HSA investment accounts
After examining these four factors, we then calculated an overall assessment. Plans with two or more positive scores and no negative assessments across menu design, investment quality, and price received a positive assessment. Plans that received negative assessments in two of those three scores earned a negative assessment, and those that landed in between received a neutral assessment.
HSAs as both spending and investing vehicles
Only one of the HSA providers we studied—The HSA Authority—earned a positive assessment as both as spending account and an investment account, suggesting that the market has some room to improve. As the market evolves, HSA providers may become better suited to serving the needs of both. But for now, HSAs that are good as spending vehicles may not necessarily be optimal investment vehicles.
Correction: An earlier version of this blog post incorrectly stated the name of the HSA provider that earned a positive assessment as both a spending account and an investment account. The provider was The HSA Authority, not SelectAccount. (Nov. 20, 2018)