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Are HSA Investors Born—or Made?

Practice Management

A recent analysis finds that while only 6% of HSA accountholders actively invest those funds—nearly two-thirds of those do so within the first year.  

The analysis by the Employee Benefit Research Institute (EBRI) characterizes those early investors as “born,” and while what distinguishes them from others is not inherently obvious, the report notes “there is some quality intrinsic to them that prompts them to invest their balances immediately.”

‘Made’ Mien

A second group—those who transition to investing within the first three years of account ownership—are considered “made.” These, EBRI report authors Jake Spiegel and Paul Fronstin say, might be the result of “some external force that prompts them to invest their balances,” specifically things like developing a familiarity with HSAs, the result of an effective benefits education campaign, or having accumulated a balance that they feel comfortable investing. However, the EBRI researchers say that among this group, the two most important characteristics they found to be associated with transitioning to investing are account tenure and balance. “In particular,” they write, “our analysis shows that a one-year increase in account tenure is associated with a similar increase in the likelihood of investing as an account balance roughly $3,250 larger.”

The report also cites employee contributions as a factor that increases the likelihood of investing, “likely signaling that engagement is an important determinant in transitioning to investing,” they write. 

Accumulate ‘Shun?’

As for the notion that people are simply waiting for their balance to grow, the report finds “only weak evidence to support” that hypothesis. When plotting the distribution of account balances when accountholders transitioned to investing, EBRI noted spikes around $1,000 (see above—it’s a minimum requirement for many plans), $3,000, and $6,000, “likely signifying thresholds that at least some investors are targeting, such as required balance thresholds for investing or health plan deductibles. However, there was a great deal of variance in account balances at the time of investing, suggesting that this only describes a small share of investors.”

Additionally, plan deductibles apparently do not serve as a strong signal to accountholders that they should save that much before investing.

There are things that stand in the way; the report highlights the impact of taking a large distribution (at least half the account balance), a factor they say is associated with a reduced likelihood of transitioning to investing, which they say may indicate that accountholders try to build their balances back up after withdrawing money from their HSAs before investing.

Implications

The report notes that only few accountholders transitioned to being investors after more than five years of account ownership—a result that they say is suggestive of two conclusions. One, that long-tenured non-investors intentionally do not invest, either because they view their HSA as a spending vehicle, or they are concerned about losses.

Secondly, since at least some long-tenured accountholders transition to investing at some point, then the researchers suspect there might be some external force driving them to invest; perhaps employers’ educational outreach efforts, personal research, or building up a sufficient cash buffer to cover short-term medical expenses, though they note that the “actual motivations” are undetermined at present. 

Indeed, it seems fair to say that many, if not most, HSA education sessions are focused on their ability to address the short-term health care expenses of the year ahead. And, considering the role they have traditionally played on the benefits menu, that makes sense. I would suggest that the true answer to why so few seem to invest their HSAs appears two-fold: First, that the vast majority of programs set a minimum threshold of $1,000[1] (or more) to take advantage of those options—alongside a working assumption in HSA education that you won’t.   

Secondly, since at least some long-tenured accountholders transition to investing at some point, then the researchers suspect there might be some external force driving them to invest; perhaps employers’ educational outreach efforts, personal research, or building up a sufficient cash buffer to cover short-term medical expenses, though they note that the “actual motivations” are undetermined at present. 

So, are HSA investors “born” or “made”? The answer at present, at least according to the EBRI research, appears to be some of both—but with many more “made” by time, education or circumstances. 

Those of us with a retirement focus[2] appreciate the long-term potential of the HSA, tout its “triple tax” advantages, and acknowledge both the potential impact of health care expenses on retirement finances, and the opportunities that an HSA offers in filling those retirement income “gaps” that “replacement ratios” never quite seem to fully contemplate. 

As HSA education goes, that might be a good place to start in “making” more HSA investors.

Footnotes

[1] The Plan Sponsor Council of America’s HSA Survey indicates that more than three-quarters require a balance of at least $1,000 to invest in anything beyond a cash equivalent. 

[2] As for implications of this analysis, EBRI explains that employers that want to encourage their workers to use their HSAs as longer-term savings vehicles may wish to consider implementing two strategies. First, since account tenure is closely linked to the decision to invest, they say that suggests that accountholders invest because they become more familiar with their HSAs, they learn more about the benefits of investing, or both—and that therefore an education strategy could be effective in encouraging accountholders to invest (although, see “What’s Holding Back HSAs?”). Secondly, since account balance seems to be closely linked with the decision to invest, they suggest that employers could consider contributing some seed money to new accountholders, particularly those with plans with very high deductibles.