Health savings account wealth is steadily growing, but providers may be able to promote its use more effectively, according to a new report from Morningstar.
According to Morningstar’s Health Savings Account Status Report for 2022, the HSA has grown at a “furious” 31% rate over the past 15 years, but “many workers don’t get enough of the HSA’s three tax benefits.” It is not used for
“How to actually use [HSAs] can be improved by users, [because] Tom Nations, Associate Director of Multi-Asset and Alternatives Strategies at Morningstar, explains:
According to the report, HSA’s invested assets will be $26.4 billion in 2022, up from $4.5 billion in 2017. In 2021, HSA’s total assets will be $98 billion, up from less than $50 billion in 2017 and less than $25 billion in 2014.
HSA contributions are tax deductible. Investment growth, interest and dividends are tax exempt. Withdrawals for qualifying medical expenses are tax-free. HSA is only available to individuals with eligible high deductible health insurance.
Account holders can invest their savings in a growing portfolio of investments over time, like 401(k)s and employer-sponsored retirement plans to cover eligible medical expenses .
Fidelity Investments estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on retirement medical expenses.
Morningstar reports that 28% of workers will have high-deductible health insurance by 2021, up from 4% in 2006.
“[For] HSA as an investment vehicle and HSA as an opportunity for health care spending growth, the benefits are to some extent not considered now, in the near future, and in retirement. “Or [HSAs have] Growing so fast and 91% of accounts not using the investment feature means they have a pretty good runway ahead. ”
HSA account providers have improved significantly since 2017, but according to Nations, there is still a lot of room for providers to adopt best practices. “Most notably, rates could drop across the board,” he says.
The average expense ratio across all offered funds is 31 basis points, according to the report.
The report also reveals that HSA still has confusing features and unnecessary friction when account holders invest their assets. To encourage its use, among Morningstar’s recommended HSA provider best practices, the report urges providers to waive investment thresholds, lower fees, and continue to screen investment lineups. increase.
Provider improvements could impact the overall use of HSA assets, particularly increased investment, Nations said.
“We expect the investment threshold to improve further,” says Nations.
Many HSA providers require account holders to seed cash and meet investment thresholds before investing assets.
“I don’t think there should be a requirement, and best practice is not to require it,” he says. “Many of these providers have lowered it to zero or reduced their investment thresholds, but some still have them and I would hope to see a little more progress on that. .”
Nations explains that providers can also improve the process of “onboarding” new user accounts for HSA, as many products separate investment and spending functions.
“[Many] times [HSA’s are] There are actually two separate accounts. We have a spending account and an investment account,” says Nations. “When you sign up for HSA, you only actually sign up for a spending account, and when you want to fund it, you have to go through the additional manual steps of opening an investment account and tying it to your spending account. Yes, and after you fund your spending account, you fund your investment account.”
Friction in investing assets can add inertia, slowing account holders’ investment in assets, he adds.
“[There are] These additional hurdles and sludge make the process very complicated,” says Nations. “On the other hand, in theory, investment account adoption rates are higher, with more than 9% of people having access to both when opening an account and clearly demonstrating that this is an available option. It’s possible that the account is being used, its features, and people have it fresh in their minds as opposed to “I have an HSA, but I don’t know how to actually set it up and invest.” There are advantages to running from scratch while it’s still early. ”
Providers have been culling investment menus as a tactic to improve the user experience, he said.
A large investment menu offering overlapping strategies, asset classes, and strategies can lead to analysis paralysis, with dozens of funds offering “overwhelming end investors.” [and] We can’t do anything,” Nations says.
Morningstar recommends providers offer 12 to 24 funds, but the average number of investments offered is 17 to 30 funds, he adds.
