Why advisors need to scrutinize HSA plans
Health savings accounts may be increasingly popular, but advisors need to make sure clients closely scrutinize the plans before signing up.
"HSAs are still in early stages of development," says Leo Acheson, a senior analyst at Morningstar. "There's been a lot of progress since they were introduced 10 years ago, but there's still a lot of room for additional improvements. Advisors need to make sure their clients really look at the fine print."
Growing awareness of the triple tax advantages of the accounts (money is deposited tax-free, grows tax-free and can be withdrawn without paying taxes as long as the money is spent on health and medical expenses) has boosted HSA use a retirement planning vehicle.
Total HSA assets have skyrocketed by 2,200%, climbing to $37 billion last year from $1.7 billion in 2006, according to the Devenir Group consulting firm. By 2018, HSA assets are projected to pass $53 billion, the firm says.
LAYERS OF FEES
Plan providers have been scrambling to keep up with the demand — but many have also piled on layers of fees.
For example, a plan can charge an underlying fund fee, a monthly account maintenance fee that can be as high as $4.50 a month and an investment fee to obtain access to the investment menu. "Investors may end up paying north of $75 a year in annual fees," Acheson says. "Assuming a $15,000 account balance, investors in some plans, such as HealthEquity, would pay over $100 a year in fees."
Providers may charge fees for ATM access, outbound account closures, check orders, transfers, paper statements, excess contributions, returned deposit items and lost or stolen debit cards.
"HSA account sizes tend to be relatively small," Acheson says, "so even though each fee might appear to be minor they can add up and take a chunk out of an average account."
Morningstar's report on the 2017 HSA industry notes that average expense ratios for HSA plans range from 0.05% to 0.99%, comparing favorably with underlying fund fees for retail mutual funds.
HSA tax advantages can more than offset a higher fee for an equivalent fund in a 401(k).
But, the report adds, "HSA plans tack on additional fees that investors must take into consideration. Most plans charge maintenance fees to cover general administrative costs. Moreover, the majority of plans charge an investment fee to participants who invest in the mutual fund lineup."
David Snyder, CEO of Perspective Partners, a retirement planning firm, cautions advisors that focusing too narrowly on HSA fees may obscure potential tax savings.
"Advisors need to ask their clients to look at what they’re getting for the fee difference," Snyder says. "The HSA tax advantages can more than offset a higher fee for an equivalent fund in a 401(k). It’s really not more complicated than that."
When comparing prices for HSA plan providers, Morningstar found that Bank of America, HealthEquity, Optum Bank and The HSA Authority received high marks for "offering investments for a total cost that is meaningfully lower than retail mutual funds."
Bank of America, however, does charge a $4.50 monthly account maintenance fee while The HSA Authority and Alliant Credit Union do not charge any maintenance fee.
When assessing an HSA plan's investment options, Morningstar stressed broad asset-class representation, recommending that "an investment menu should offer a comprehensive set of options so that do-it-yourself investors can build well-rounded portfolios."
Advisors should beware of plans that overwhelm clients with overlapping choices, Acheson says. "HSA plans are getting better at menu design but still need to improve," he says. "Clients need options, but too many can lead to decision paralysis."
"Fees can take a chunk out of an average HSA account,"says Leo Acheson, senior analyst for Morningstar.
Quality of investments and performance in HSA plans is also critical, Acheson notes. "We focus on the quality of the investments and underlying managers," he says. "Advisors should carefully evaluate the plan's portfolio managers, its investment process, what funds cost, the history of the parent company as a fund steward and past performance."
In Morningstar's 2017 HSA report, plan providers benefit Wallet, HealthEquity, Optum Bank and The HSA Authority received high scores "for having the strongest manager lineups."