HSA fees drop, investment design shows improvement

Fund menus are important as financial advisers recommend clients invest HSA assets for the long term

Investment funds in health savings accounts have improved substantially over the past few years on several fronts, including fund options, quality and fees, according to a new report from Morningstar Inc.

“You’ve seen definite improvements,” said Leo Acheson, associate director of multi-asset and alternative strategies at Morningstar and the report’s author.

[Recommended video: Financial planning wasn’t even a thing 50 years ago]

There’s been a 33% reduction in overall HSA fees over the past two years, to 0.73% as of end-August 2019 from an average 1.09% as of end-May 2017, according to Mr. Acheson.

Those fees encompass administration fees, investment fees charged to investors for the ability to invest HSA money, and investment management fees. Mr. Acheson believes the fee reduction is largely due to a shift toward providers offering more passive strategies. Providers have also shifted to offer institutional rather than more-expensive retail share classes of the same funds, he said.

“You’ve seen fund fees in general come down,” Mr. Acheson said.

At the same time that fees have decreased, investment menu design has improved. Whereas some providers used to have hundreds of investment options available for individuals, which causes “decision paralysis” among investors, providers now offer between 17 and 33 options, according to the Morningstar report. There’s still room for improvement here, the report added, explaining that the ideal number would be around 12 to 24.

Providers have also plugged gaps in the availability of certain asset classes such as intermediate-term bond funds, the report said.

An improvement in the quality of funds in health savings accounts is important for financial advisers and their clients, because many financial planners believe it’s better to invest HSA money for the long term instead of tapping the accounts for short-term health costs.

Many said that, all else being equal, HSAs are a better way to save money for retirement than a 401(k) or inidvidual retirement accounts because of their unique triple tax benefits. But poor investment quality in many HSAs had led advisers to question that logic, at least in some circumstances.

The report examines data on HSAs offered to individuals by 11 of the largest HSA providers. It doesn’t consider data on HSAs available through employers, since fees in those plans can vary substantially based on employer negotiations with providers, though Mr. Acheson said the broad investment trends are directionally similar in the employer market.

However, there’s still room for improvement, the report said. For example, most providers require individuals to keep money in a checking account before they can invest. Transparency is also “subpar,” according to the report, since most providers’ websites don’t disclose relevant fee information.

Health savings accounts are projected to hold $64.2 billion by the end of 2019, with $13.8 billion of that held in investment funds, according to consulting firm Devenir Group. The group estimates HSAs will hold $88.2 billion by the end of 2021, with $21.2 billion in investment funds.