The following article was sourced from PlanDesign.com and reported by

MORNINGSTAR’S “2022 Health Savings Account Landscape” reports that HSAs have grown at a 31% rate over the past 15 years. Yet, “[their] use could improve, as only 9% of accounts had invested assets in them,” says Tom Nations, associate director, multi-asset and alternative strategies, at Morningstar and the paper’s author. 

For a few of the findings, invested HSA assets are now $26.4 billion, up from $4.5 billion in 2017. Also, high-deductible health plans—an employer’s prerequisite for offering HSAs—covered 28% of workers in 2021, up from 4% in 2006.

When HSAs do include an investment option, ideally the holder may invest what she saves, as she would in a 401(k) or other employer-sponsored defined contribution plan, letting the money compound to pay for qualified medical expenses in retirement. Of added benefit, her contributions are tax-deductible: Investment growth, interest and dividends are tax-exempt, and withdrawals for qualified medical expenses are tax free.

HSAs’ potential for this purpose has yet to be fulfilled, Nations points out. “That HSAs have grown so rapidly and 91% of accounts aren’t using the investment feature means there’s pretty good runway ahead.”

The study found, too, though, that the accounts still have confusing features and needless hindrances to the person investing assets. While providers have significantly improved their offerings since Morningstar’s first study, in 2017, Nations says, there remains room for them to incorporate better practices. “Notably, fees could come down across the board,” he says. 

Also stymying investing, some HSA providers require account holders to meet and keep a minimum cash balance or spending account minimum before they may invest. “We think best practice would be to not require that,” Nations says. “Many providers have moved that down to zero.”

In need of improvement, as well, he says, is the process for onboarding new-user accounts, as many of the products separate the investment features from spending features. 

“Many times HSAs are actually two separate accounts: There’s a spending account and the investment account,” he says. “If you sign up for an HSA, what you’re actually signing up for is the spending account only, and then, if you fund it, you need to take the additional manual step of opening up the investment account, tying it to the spending account and then funding the investment account after funding the spending account.

“There are these additional hurdles and sludge, which really complicates the process,” he says.

Morningstar advises culling the investment lineup. Large menus that offer duplicate strategies and asset classes may “lead to analysis paralysis, that overwhelm the end investor,” Nation says. 

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