Health savings account assets have grown at a 31% annualized growth rate over the past 15 years, and while the industry has improved its offerings in that time, more can be done, according to a new report.
The rapid adoption of high deductible health plans (HDHPs) has helped grow the still-young HSA industry, according to Morningstar’s sixth annual HSA Landscape Report. In 2021, 28% of covered workers opted into a HDHP, up from 4% in 2006. HSA assets grew to $98 billion at year-end 2021.
While providers have cut fees, streamlined investment menus and are offering higher-quality funds, they still have high costs and confusing features, the report notes. What’s more, individuals are not taking full advantage of HSA investment features or tax benefits.
“HSAs are valuable tools for investors when used properly, but the industry is still young and maturing. Its opaque structure needs improvement,” said Tom Nations, lead author of the study and associate director of manager research. “As the space continues to grow, we're looking to see more widespread improvement, namely among account investment menus, fees, and fund quality.”
As part of its report, Morningstar evaluates 10 of the most prominent HSAs available to individuals, assessing these providers on two different use cases: as investment accounts to save for future medical expenses and as spending accounts to cover current medical costs. This year’s report also provides actionable best practices for individuals seeking HSAs.
Key findings from the study include that just 9% of HSA accounts reviewed have investment assets, signifying that HSA users are not taking full advantage of the accounts' investment features or triple tax benefit. Morningstar notes that, when used optimally, HSAs have more tax benefits than 401(k)s, 529 education-savings plans, and traditional and Roth IRAs.
Part of the issue is investor awareness, Morningstar suggests, noting that savers must explicitly opt for the investment vehicle at most providers, rather than both spending and investing accounts opening at account inception. “HSA providers should streamline account opening (ideally opening both spending and investing accounts at inception), outline the process for transferring assets between the two, and regularly surface the benefits of investing HSA dollars,” the report notes.
And while HSA providers have improved their offerings since Morningstar’s first report in 2017, the firm notes that fee schedules remain high and vary across providers, most require individuals to meet spending account minimums before they can invest, and fund lineups still offer redundant and complicated options that can be hard to use.
To that end, Morningstar further suggests that regulators should consider reviewing guidance and policies on retirement savings plans to assess whether some features could be applied in the HSA context, such as default savings rates and investment alternatives, allowing employers to automatically place those deferrals into sensible investments. “Morningstar has long pushed providers to eliminate investment thresholds and allow immediate investment, but the U.S. Department of the Treasury could move to eliminate investment thresholds entirely,” the report emphasizes.
Meanwhile, as interest rates have risen in the past year, interest paid to HSA holders has become increasingly important to analyst evaluations, the report notes. As such, the best HSA providers pay interest rates that increase with market shifts; so far, Fidelity is the only provider that offers higher interest rates than the average national savings account rate of 0.17%, according to the report.
The four largest HSA providers—HealthEquity, Optum, Fidelity, and HSA Bank—account for nearly two-thirds of the total HSA market with roughly $64 billion in assets combined. HealthEquity overtook Optum at year-end 2021 as the industry's largest provider and widened its lead in 2022’s first half.
The 10 companies reviewed in the report include:
- Associated Bank
- Bank of America
- First American Bank
- HSA Bank
- HSA Bank
- The HSA Authority
Additions to the study this year included First American Bank and UMB’s HSA offerings. Industry consolidation continued the past year, with previous participants Bend, HealthSavings, and PayFlex all acquired by other companies, the report notes.
Note that the analysis does not specifically include HSAs offered by employers, since the fees charged by the same HSA plan can vary among workplaces that offer it; however, it can still help those who get their HSAs through their employers, because providers’ employer offerings are usually similar to their retail versions.