Investing Health Savings Account Assets

The marketplace for investing Health Savings Account (HSA) assets continues to evolve. 

Earlier this year Devenir released a white paper on HSA investing.[i] Investment menu construction was part of the Plan Sponsor Council of America 2019 Health Savings Account survey.[ii] Some of those survey results were incorporated in a recent PSCA white paper on Health Savings Accounts.[iii]

To understand HSA investments, some background about HSA objectives is essential. 

(Re)Establishing Objectives

HSA investment selection activity to date turns out to be highly correlated with the objectives for adopting HSA-capable health options and Health Savings Accounts. Today most plan sponsors adopt an HSA-capable option to moderate health care cost trends by having consumers better manage their use of health services. Workers appear to be increasingly aware of the longer-term benefits from making tax-deductible contributions and setting aside funds for tax-favored uses. 

Even after 15 years, the HSA industry is still in a developmental phase. For example, unlike almost all pre-tax cafeteria plan contributions (medical, dental, Health FSA, Dependent Care FSA), HSA contributions generally don’t include an automatic enrollment or escalation process (pre-tax contributions are taken whenever coverage is selected). More than a decade ago, in my last plan sponsor role, when a worker adopted the HSA-capable health option, we did make contributing to the HSA automatic. That type of automatic feature, automatically enrolling employees in the HSA if they enroll in the HSA-qualifying health option, is a practice today among about 30% of the plans we surveyed. 

Many plan sponsors and workers are not well versed in HSA-capable health coverage requirements, investment selection, etc. Little wonder that 60% of employer-respondents to our 2019 inaugural HSA survey said that employee education was their dominant concern. That is, many, perhaps most plan sponsors and participants are still “learning to walk” when it comes to HSAs and the opportunity they present. 

More than 75% of employers fail to offer their workers access to America’s most valuable benefits tax preference—the HSA. Even where an HSA-capable health option is offered, the PSCA survey results confirm that many plan sponsors:

• fail to anticipate worker biases;
• structure coverage choices and processes in ways that impede HSA enrollment; and/or
• fail to adjust other coverage options to facilitate worker transitions to HSA-capable designs.

HSA Investment Decision-Making

Much like the process described above in creating HSA-capable saving, most plan sponsors and participants may still be in the “learning to walk” stage when it comes to constructing HSA investment menus. 

To avoid subjecting the HSA to ERISA, almost all plan sponsors seek investment selection proposals from HSA-capable health insurers and/or HSA account providers. Importantly, the HSA is subject to the same prohibited transaction requirements that apply to IRAs. As a result, the HSA account provider was identified as the party who selected investments in more thsn 90% of the surveyed population—likely as part of the initial adoption of an HSA-capable option.

The Devenir white paper linked investment selection to “use cases”—contrasting the “use cases” for HSAs with 401(k)s. 401(k) plans and IRAs typically incorporate liquidity provisions that allow participants the opportunity to leverage their accumulated assets. So, 401(k) investments may not be solely focused on income replacement at retirement. I was not surprised to see that fewer than 3% of HSAs offer the same investment lineup for HSA assets as for 401(k) assets. Most plan sponsors don’t use the same trustee for their HSA and 401(k)—frequently resulting in different investment lineups.

Today, most employers and participants are still focused on current year “use cases” such as out-of-pocket medical expenses. An HSA’s choice architecture often reinforces the same mindset through the use of debit cards. Furthermore, 85% of the HSA accounts reported in the PSCA survey also limited investments to cash-equivalents until meeting a minimum balance requirement. These limits may result in a somewhat “self-fulfilling” outcome for investments—reinforcing participant contribution and spending elections that are comparable to those made for Health FSAs (even though HSA assets are not subject to use or lose and HSA assets can be invested). Many contribute only what they expect to spend on qualifying expenses in the current year. Many spend down their accounts each year (making investment decision-making moot). 

Health Savings Account investment menus and selections will likely evolve whenever the employer reconsiders the HSA-capable health plan insurer/administrator, should the employer add automatic features for HSAs (directly or through contract with the HSA vendor), or simply over time where employers contribute to the HSA and/or as assets under management increase. 

At some future date, when assets under management exceed $1 trillion, we expect to see new competition for HSA assets via account aggregation/consolidation. An account holder can transfer assets at any time. An account holder need not be enrolled in a HSA-capable health option to transfer or rollover assets. Look for more HSA vendors to pursue these assets—incorporating into their transfer/rollover sales pitch the opportunity to use the same investment choices an individual has in their personal IRA, to lower their expenses by avoiding the fees associated with multiple HSA accounts, and to avoid the minimum account balance requirements that apply in most of today’s HSA accounts.