Morningstar Magazine - October/November 2017 - 19

might think that many of their workers are not
in a position financially to safely extend their
savings to HSAs after investing for retirement and
college. So, they do not give workers the
same generic save-more advice for HSAs that they
give for retirement accounts.
Also, some HSA plan providers do not allow for
first-dollar investing, instead requiring the
accountholder to build their savings and cross
a threshold before the option to invest
becomes available to them. The introduction of this
friction all but assures that some less-engaged
accountholders will not invest their assets.
Some HSA providers, such as local banks
and credit unions, may not even offer
an investment lineup with their HSAs, providing
only checking accounts. In a low interest-rate
environment, where meaningful returns
are hard to come by, the lack of an investment
lineup hampers accountholders and their
ability to use their HSAs as a supplement to
retirement savings.
Weak Options

Among the accountholders who do invest their
HSA assets, the investing experience is
substandard. As you'll read in this issue's Spotlight
section, Morningstar assessed 10 prominent HSA
providers and concluded that these accounts
are ripe for improvement ("Room for Improvement,"
Page 38). The report found that only one plan
provider earned a positive assessment for use as
both a spending vehicle and an investment vehicle.
When we looked at nine plan providers solely
on the investment account side, only four
providers earned positive assessments; four
earned neutral scores, and one earned
a negative assessment. Of the four that earned
a positive assessment, only one provider
earned positive scores for all four pillars of our
assessment process: menu design, investment
quality, price, and performance.
These conclusions certainly do not describe
everyone's experiences with HSAs, as this report
was not an exhaustive review of every HSA
plan provider. However, by focusing on 10 of the
larger HSA providers, we think the results suggest

that providers should vastly improve their
investment options.
Education Gaps Remain

In addition to weak investment options, another
area that needs improvement is education.
True, providing education on using HSAs is more
complicated than giving guidance around
retirement savings. In addition to problems such
as asset allocation and risk tolerance,
accountholders must solve for additional variables
when making decisions about HSA contributions
and distributions. Accountholders must
consider their deductible and out-of-pocket
maximum, and whether they intend to invest HSA
funds, and if so, whether they have sufficient
liquid assets to pay for medical expenses
out of pocket. Also, retirement and college
generally have predictable timeframes. Healthcare
expenditures do not.
But finding ways to educate participants
would go a long way toward helping them get the
most out of their HSAs. This will become
particularly important if efforts to raise HSA
contribution limits are successful.
Policymakers: HSA Market Is Still Nascent

As policymakers consider expanding HSAs,
they should keep in mind that few people
get the full benefits of their HSAs today and that
the provider market needs improvement.
Fundamentally, this is because the market is still
small, and the industry and plan sponsors
are still learning to communicate the benefits of
HSAs to participants.
However, one possible approach would be
for Congress to create an HSA "sidecar." An HSA
sidecar would work in a similar way to a
"deemed" or "sidecar" IRA, which permits
employers to allow employee contributions
to an IRA outside of the workplace-sponsored plan
but maintain it as a part of the plan's assets.
The HSA sidecar would similarly allow a
plan sponsor to offer employees an opportunity
to invest HSA funds in their workplace-sponsored
retirement plan. Accountholders could then
have access to the same investment options
available through their employer-sponsored
retirement plan.

However, such an approach would need to be
carefully designed to ensure participants
receive holistic guidance before deciding to invest.
As I noted earlier, people investing their HSA
money for retirement expenses need to be able
to cover possible out-of-pocket costs for healthcare,
which could be up to $13,600 for a family
covered by a high-deductible health plan. Further,
we may well see a trend toward higherquality HSA fund lineups, obviating the need
for the sidecar solution.
Still, if policymakers pursue legislation
that expands HSAs, they should consider sidecars an option if there are sufficient
guardrails and education to ensure people invest
when appropriate.
An Underused Tool
HSAs can be a powerful tool for workers saving for
retirement. Accountholders who can pay for
medical expenses out of pocket can leverage the
triple-tax-advantaged status of HSAs and
reimburse themselves for expenses after their
investment principal has had time to grow. Or they
can use their HSAs to pay for the considerable
medical expenses they can expect to face
in retirement. However, many accountholders
do not pursue these opportunities, and those who
do are sometimes saddled with less-than-stellar
investment options.

Holistic education surrounding HSAs can help
improve accountholders' experiences and
outcomes. The decision to invest, after all, requires
accountholders to consider whether they
have the sufficient household savings to do it.
Further, a sidecar HSA could allow the
accountholder to access the same investment
options available through their workplacesponsored retirement account, which may have
a better fund lineup and lower fees.
With better messaging and guidance
surrounding HSAs, accountholders will then
be better positioned to leverage these improved
investment options. K
Jake Spiegel is a senior analyst with Morningstar
Research Services.

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Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
