Morningstar found that the quality of investment options has improved across health savings accounts (HSAs), but high fees and low transparency remain hurdles.
In its second annual study assessing plans from 10 of the largest HSA plan providers, Morningstar assessed each plan as both an investing vehicle and spending vehicle. When evaluating HSAs as a spending vehicle, Morningstar considered three main components: maintenance fees, additional fees and the interest rates offered on investors’ checking accounts. When assessing the merits as investment vehicles, it considered investment menu design; quality of investments; price; investment threshold, or the amount investors must keep in the account before investing; and performance.
Morningstar found that the quality of investments across the 10 largest HSA plans remains strong and has improved since last year, with at least half of each plan’s investment options earning Morningstar Analyst Ratings of Gold, Silver or Bronze. Investment menu designs have also gotten better, with several plans taking steps to reduce menu overlap or add core investment options. Still, a number of plans haven’t made the same improvements to their investment choices and many suffer from high fees, explaining why only three receive Positive assessments as an investing vehicle, and just one earns a Positive assessment as a spending vehicle.
Fees vary significantly across plans, and most require individuals to keep money in the account before they can invest. Fees remain elevated. Across the 10 plans, the average cost for passive funds ranges from roughly 0.30% to 0.75% per year, and the average for active funds from about 0.80% to 1.20%. Eight of the 10 plans require investors to keep $1,000 or $2,000 in the account before they can invest, which can create an opportunity cost.
Transparency remains poor, according to the analysis. Only four of the 10 plans evaluated disclose relevant fees, interest rates and investment lineups on their websites, and call centers often struggle to provide this basic information.
From its analysis, Morningstar offered tips for best practices. HSAs as spending vehicles should avoid account maintenance fees, limit additional fees, offer reasonable interest on deposits and provide FDIC insurance. HSAs as investing vehicles should 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 account before investing).
“Thanks to increased use of high-deductible health insurance plans, which are often paired with an HSA, and unrivaled tax advantages, HSA plans are more popular than ever,” says Leo Acheson, associate director of multi-asset and alternative strategies team at Morningstar. “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.”Morningstar’s report on its analysis may be downloaded from here.