As Health Costs Dominate Budgets, HSAs Continue to Emerge as Retirement Saving Vehicles

Art by Marc Rosenthal

The number of health savings accounts has seen significant growth in the last few years as Americans grapple with the increasing challenges of controlling health care costs.

“Health care cost is trapping almost 20% of GDP over the last several years,” says Tom McCarthy, the head of the health care digital experience team within Fidelity Investments’ health division. “Twenty cents of every single dollar in this country are going toward a medical or health care expense to a facility or to research. It’s a huge problem, both for the employer as well as the employee.”

One way to prepare for these health care cost needs while not eroding tax-deferred retirement savings? The HSA, nearing its 20-year anniversary after being signed into law at the end of 2003. Last year, HSAs exceeded $100 billion in total assets for the first time, and in early 2023, accounts experienced significant asset growth, according to research from HSA consultant Devenir Group LLC. At the end of January, total assets reached $112.5 billion, up 8% since year-end 2022.

A Savings Program Good for Your Health

Fidelity, which offers HSAs, has 2.8 million accounts, with more than $17 billion in assets. Growth comes in part from a sales message focused on the portable retirement benefit the savings vehicle can provide, according to McCarthy. The firm sells the accounts via 1,600 employer clients, but it also offers HSAs directly to the public through its retail division, as well as through the Fidelity Institutional division using financial intermediaries.

“[HSAs] are used very much in conjunction with retirement savings,” says McCarthy. “We see a significant amount of demand from our employer clients of all shapes and sizes, from the largest logos in the country to small employers, obviously offering mostly 401(k)s. There are other different types of retirement solutions alongside a 401(k). If that employer is offering a consumer-directed health care plan, they very often offer an HSA account, with that to be used as both a savings and a spending vehicle.”

McCarthy says it is important to stress to employers and participants that, unlike flexible spending accounts, or other accounts in which you “use it or lose it,” HSAs are individually owned accounts that the participant or employee puts money into, pretax, from their paycheck.

“They elect to either keep that in cash invested for the long term or use it for current or future medical expenses. It is their account, they own it,” he says. “If they were to leave that company, they take that HSA with them. They could use it now or they can use it as a retirement vehicle in the future.”

Advancements in HSAs

Greg Puig, a partner in and head of group insurance at the Sentinel Group, has noticed many new HSA advancements in recent years, with a focus on improving the investment options—and outcomes—available if a participant keeps their money in the account.

Specifically, Puig has seen vendors make investment recommendations within their HSA vehicles, a useful addition, as few individuals are prepared to select which ones would be right for them.

“401(k) plans, which have a lot of target-date funds, have a ‘set it and forget it’ type of mentality. What we’ve found with a lot of the HSA vendors is that they didn’t have that,” says Puig. “They have an array of mutual funds for people to choose from, with various risk factors associated with them, high growth funds, low growth funds, etc. Now HSA vendors make it easier for people to make the right investment vehicle selections for them.”

Another advancement is making web-based and mobile-based platforms easier to use from an investable assets’ standpoint, says Puig.

“They’ve made it a lot easier for somebody to just click a checkbox and say, ‘Yes, I want to start investing any dollar over what the whatever the required cash asset size is,’ which is really nice,” he says. “Whereas before, the process was more cumbersome and a little bit more manual than that.”

He has also seen several vendors leverage internal investment teams to make a recommended fund write-up, better ensuring participants are getting the best guidance for their HSA investments.

“By having a recommended fund lineup, not a mandatory ‘We’re-going-to-put-your-money-into-this’ account, I think it bypasses some of that fiduciary liability that people are worried about,” says Puig.

Growth Accounts

When it comes to the investing within HSAs, Megan Pacholok, a senior research analyst for Morningstar Research Services LLC, says it will largely depend on the provider of the account.

HSA providers will typically include a couple of equity funds and some core bond funds. They can include a target with risk theories, so it has a conservative, moderate and growth portfolio. In other instances, they’ll also include a TDF, she notes.

Overall, the plans do not work exactly like a retirement account due to various limits and restrictions, according to Pacholok.

“HSAs have a restriction on how much you can contribute to it each year,” she says. “Some of them have a brokerage account in which you can choose your own investments outside of that menu, but [in] others, you really are restricted to only that.”

Another restriction would be an investment threshold, so an individual would have to keep funding their spending account prior to investing their fund, says Pacholok. A lot of HSAs do have the requirement to keep at least like $500 to $1,000 in the account.

Despite these restrictions, as HSAs have advanced, they are showing more and more options that look like a retirement savings plan.

As for growing savings, the possibilities are “infinite,” says Puig. “[Money] goes in tax-deferred, grows tax and as long as it comes out for eligible medical expenses, all of the assets are never taxed. A triple tax advantage; there’s not many things that can do all three of those.”