Provider Friction to Invest HSA Assets Stymies Usage

Health savings accounts assets have risen steadily but providers could more effectively boost their use, a new Morningstar report finds.

The 2022 Morningstar Health Savings Account Landscape report finds that while HSAs have grown at a “blistering” 31% rate over the past 15 years, “plenty of workers do not take full advantage of HSAs’ triple tax-advantages.”

“The actual usage of [HSAs] could improve by the users, [because] only 9% of accounts had invested assets in them,” explains Tom Nations, associate director, multi-asset and alternative strategies, at Morningstar. 

Invested HSA assets are $26.4 billion in 2022, an increase from $4.5 billion in 2017, according to the report. Total HSA assets were $98 billion in 2021, an increase from below $50 billion in 2017 and under $25 billion in 2014.

HSA contributions are tax-deductible: investment growth, interest and dividends are tax-exempt; and withdrawals for qualified medical expenses are tax free. HSAs are only available to individuals with qualifying high-deductible health plans.

Account holders can invest savings in investment menu lineups, that grows over time, like in a 401(k) or employer-sponsored retirement plan to cover qualified medical expenses.  

Fidelity Investments estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement.

The Morningstar report finds that high-deductible health plans covered 28% of workers in 2021, up from 4% in 2006.

“[For] HSAs as investment vehicles and opportunities for growth for medical expenses, currently, in the near-future and then in retirement, that advantage is less on the table to a certain extent,” says Nations, the report’s author. “That [HSAs have] grown so rapidly and 91% of accounts aren’t using the investment feature means there’s pretty good runway ahead.”

While HSA account providers have significantly improved, since 2017, Nations explains, there remains much room for providers to incorporate best practices. “Most notably, fees could come down across the board,” he says. 

The report finds that the average expense ratio for all funds offered is 31 basis points.

The report also finds that HSAs still have confusing features and needless friction for account holders to invest assets. Among the HSA provider best practices recommended by Morningstar to boost their use, the report urges that providers ditch investment thresholds, reduce fees and continue to cull investment lineups.

Providers’ improvements may effect overall greater use and specifically, investment of HSA assets, says Nations. 

“We would like to see more improvement on investment thresholds,” says Nations.

Many HSA providers require account holders to seed the account with cash and meet an investment threshold before investing the assets.

“We think that there shouldn’t be requirements and the best practice would be to not require that,” he says. “A lot of these providers have moved that down to zero or even reduced their investment threshold amount but some still have them and we’re looking to see a little bit more progress on that.”

Nations explains that providers can also improve the process for ‘onboarding’ HSA new user accounts, because many of the products separate the investments from spending features.

“[Many] times [HSA’s are] actually two separate accounts: there is a spending account and the investment account,” says Nations. “If you sign up for an HSA, what you’re actually signing up for is the spending account only and then if you fund it, you need to take the additional manual step of opening up the investment account, tying it to the spending account and then funding the investment account after funding the spending account.”

Friction for investing assets may add inertia, blunting account holders’ investing their assets, he adds.

“[There are] these additional hurdles and sludge, that really complicates the process,” Nations says.  “Whereas, in theory, if you opened an account and it offered you access to both right off the bat and made it clear that this was an available option, you might see higher adoption of the investment account and more than 9% of accounts using that feature. There is a benefit to doing it right at the front while people have it fresh in their mind as opposed to ‘oh, I have an HSA but I don’t know how to actually get it set up and invested.’”

Providers have culled their investment menus, as a tactic to improve the user experience, he says.

Large investment menus that offer duplicate strategies, asset classes and strategies may “lead to analysis paralysis, where you’re offering dozens and dozens of funds that overwhelm the end investor [and] nothing gets done,” says Nations.

Whereas Morningstar recommends providers offer between 12 and 24 funds, the average number of investments offered is between 17 to 30 funds, he adds.