HSA fees fall, but their use as investment vehicles remains limited

Fees associated with health savings accounts are falling but only a fraction of account holders use their HSAs as investment vehicles — and financial advisors can help turn around the latter trend, experts said.

Morningstar Inc. Thursday released its annual “landscape study” on HSAs, which shows that through the middle of this year, the total amount of assets in HSAs has grown to $116 billion. There are now 21 times more assets in HSAs than there were in 2006.

The study indicated that seven of the top 10 HSA providers kept fees at a low level, and all 10 were rated “above average” on their investment menus. But the survey also found that only 18% of HSA participants are using them as investment accounts despite their tax advantages.

“Overall, the study found HSA features have improved in the past year with several plans cutting fees and offering higher quality investment menus,” Morningstar said in a statement. “However, the industry is still maturing and falls short on several issues like transparency, ease of use, and costs.”

The vehicles offer several tax benefits. For instance, contributions are made on a pretax basis, the fund can grow tax-free and distributions can be taken tax-free for medical expenses. Distributions taken for any other reason than medical expenses at the age of 65 and over are subject to marginal tax rates, like an individual retirement account.

But HSA holders appear to be hesitant to use them as investment accounts.

“The vast majority of HSA holders aren’t taking advantage of the ability to invest their HSA funds,” said Jake Spiegel, a research associate for health and wellness at the Employee Benefit Research Institute. “HSAs are still the Wild West. People are trying to figure out how to use them.”

The financial industry needs to do more to raise awareness about how best to utilize HSAs, said Chad Goerner, a financial advisor and senior institutional consultant at RBC Wealth Management.

“Just as we deliver education for 401(k)s, we need to do the same thing in the HSA space … to help plan participants and sponsors understand just how powerful these vehicles can be,” he said.

The Morningstar study shows there’s “a lot of room for improvement” in the use of HSAs for investing, Goerner said. Financial advisors can help elevate the accounts with their clients.

“HSAs should be included in that retirement planning discussion,” he said.

Spiegel also recommends that HSAs be part of the financial planning conversation. An HSA “can be a massive tool for accumulating wealth, if it’s appropriate for the client,” he said.

Fidelity Investments was the only HSA provider to garner an overall “high” assessment on the medical spending and investment side for the HSAs it offers. Morningstar also evaluated Associated Bank, Health Equity, Lively, Bank of America and HSA Bank, among others.

“At the top end of the market, you’re seeing a lowering of fees, which is unequivocally a good thing for account holders,” Spiegel said.