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HSA Investment Quality Improving, But High Fees, Transparency Remain Hurdles

Practice Management

HSAs continue to increase in popularity thanks to their triple tax advantages and increased adoption in health plans, but there is room for improvement, according to a new study.

Morningstar’s second annual study assessing HSAs from 10 of the largest providers finds that most have improved the quality of their investments and investment menu designs since last year, but none earned positive marks across the board for use as a spending or investing vehicle.

The HSAs evaluated were those available to individuals, as opposed to those offered through employers, where fees can vary based on a number of factors. The firm assigned positive, neutral and negative scores to various criteria, and aggregated those scores to reach an overall assessment for each HSA.

According to the study, fees vary significantly and most require individuals to keep money in a checking account before they can invest. Moreover, transparency apparently remains weak, as few providers’ websites fully disclose all relevant information needed to select a plan, according to the study.

“We’re encouraged by the improvement in the quality of HSA investment options since last year, but the industry can raise its game by providing greater transparency on fees, investment options, and interest rates and further reducing high plan expenses,” notes Leo Acheson, associate director of the multi-asset and alternative strategies team at Morningstar.

Investing Versus Spending

Morningstar evaluated the HSAs on their use as an investment vehicle for future health expenses and as a spending vehicle to cover current costs. This year, The HSA Authority came out on top as the best provider both as an investment and a spending vehicle. Bank of America and Further also received positive assessments of their HSAs for use as investment vehicles.

Morningstar found that the quality of investments across the 10 largest products remains strong and has improved since last year, with at least half of each HSA’s investment options earning Morningstar Analyst Ratings of Gold, Silver or Bronze. What’s more, investment menu designs have gotten better, according to the report, with several providers taking steps to reduce menu overlap or add core investment options.

Nevertheless, a number of providers haven’t made the same improvements to their HSAs’ investment choices, and many products charge high fees, the report notes. Across the 10 HSAs evaluated, the average cost for passive funds ranges from roughly 0.30% to 0.75% per year, while the average cost for active funds ranges from about 0.80% to 1.20%. Additionally, 8 of the 10 products require investors to keep $1,000 or $2,000 in a checking account before they can invest, which can create an opportunity cost.
And only 4 of the 10 providers evaluated disclose relevant fees, interest rates and investment lineups on their websites. Call centers also apparently often struggle to provide this basic information, the report notes.

The report addresses HSA best practices as investment vehicles, suggesting that HSA providers:

  • charge low fees for both active and passive exposure;
  • offer strong investment strategies in all core asset classes while limiting overlap among options; and
  • allow first dollar investing (by not requiring money to remain in the checking account before investing).

The providers reviewed in the report are:

  • Bank of America
  • BenefitWallet
  • Fifth Third
  • Further (formerly SelectAccount)
  • HealthEquity
  • HealthSavings Administrators
  • HSA Bank (Morningstar’s HSA plan provider)
  • Optum
  • The HSA Authority
  • UMB Bank