Morningstar Magazine - October/November 2017 - 38

Spotlight: HSAs

Room for Improvement
Providers of health savings accounts
need to up their game, according
to our study.
LANDSCAPE

Leo Acheson, Jake Spiegel, and Heather Larsen

When it comes to health savings accounts, or
HSAs, investors have had few resources
available to help them navigate hundreds of plan
providers. This lack of information has likely
contributed to their underuse as a savings vehicle
despite their valuable tax benefits.
For the first time, Morningstar conducted
an in-depth analysis of HSAs to provide a comprehensive resource for investors and
employers selecting a plan. We evaluated
10 of the largest HSA plan providers in this
report through two lenses: as spending vehicles
to cover current medical costs and
as investment vehicles to save for future
medical expenses.

long as the money is used to cover qualified
healthcare expenditures.
There are two compelling cases for people
to use HSAs. First, investors can use them as a
spending vehicle, depositing money into
a checking account to use for near-term
healthcare expenses. Because contributions

and withdrawals for qualified medical
expenditures are tax-free, workers can increase
the buying power of their healthcare dollars.
This is particularly beneficial for workers with
limited resources.
Second, HSAs can be used as investment
vehicles to save for future medical expenses.
Fidelity estimates that retired couples can expect
to pay more than $260,000 on healthcare
in retirement. Considering that HSAs feature
tax-exempt investment growth and interest, it
would be optimal from a wealth-building
standpoint for individuals to invest their HSA funds,
pay for medical expenditures out of pocket,
allow their investments to grow tax-free for many
years, and "reimburse" themselves for their
medical expenses many years later. Funds from
HSAs can be used to pay Medicare premiums, for
example, and HSAs can be used to fund long-term
end-of-life care.

EXHIBIT 1

What Makes a Good HSA We assessed HSAs based on how investors use them-
as spending and investment vehicles.
Spending Vehicle

Criteria Evaluated

Best Practices

Importance

Maintenance
Fees

The monthly fee the plan charges,
and whether the fee is waived
after the account reaches a certain
threshold in deposits.

Offer a checking account with
no monthly account maintenance fee,
preferably at any deposit level.

] High

Interest Rate

Interest rate offered on deposits.

Offer a reasonable amount of interest
on FDIC-insured accounts.

[ Low

Menu Design

The asset classes available to
investors via the investment menu.

Offer exposure to core asset classes,
at a minimum, while limiting overlap
among options.

] High

How We Assessed the Plans
HSAs are offered in conjunction with highdeductible health plans. They are tax-sheltered
accounts for individuals to save for medical
expenses that aren't covered by the health plan.
Interest in HSAs is rising, but they remain
a very underresearched corner of the market.

Quality of
Investments

The attractiveness of the funds in
the investment menu.

Offer strong funds that are likely to
outperform benchmarks and peers
over the long haul on a forwardlooking basis.

] High

Price

The total cost borne by plan participants, including underlying fund
fees, maintenance fees,
and investment fees.

Offer investment options with belowaverage expense ratios and limit
other expenses, such as maintenance
and investment fees.

] High

An HSA is triple tax-advantaged: Pretax dollars
go into the HSA; the money grows on a
tax-free basis; and withdrawals are tax-free as

Performance

The performance of the plan's
investment options.

Investments have delivered strong
risk-adjusted results.

[ Low

Our takeaway: Out of the 10 plans we evaluated,
only one looks compelling for use as both a
spending vehicle and an investment vehicle,
suggesting there is much room for improvement
across the industry.

38

Morningstar October/November 2017

Investment Vehicle

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