Data & Research October 5, 2022

Best Practices for Providers to Boost HSA Invested Assets

While health savings account assets have reached near $100 billion, account holders’ invested assets have increased slowly.

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Health savings accounts assets have risen steadily but providers could more effectively boost their use, a new Morningstar report finds.

The 2022 Morningstar Health Savings Account Landscape report finds that while HSAs have grown at a “blistering” 31% rate over the past 15 years, “plenty of workers do not take full advantage of HSAs’ triple tax-advantages.”

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“The actual usage of [HSAs] could improve by the users, [because] only 9% of accounts had invested assets in them,” explains Tom Nations, associate director, multi-asset and alternative strategies, at Morningstar. 

Invested HSA assets are $26.4 billion in 2022, an increase from $4.5 billion in 2017, according to the report. Total HSA assets were $98 billion in 2021, an increase from below $50 billion in 2017 and under $25 billion in 2014.

HSA contributions are tax-deductible: investment growth, interest and dividends are tax-exempt; and withdrawals for qualified medical expenses are tax free. HSAs are only available to individuals with qualifying high-deductible health plans.

Account holders can invest savings in investment menu lineups, that grows over time, like in a 401(k) or employer-sponsored retirement plan to cover qualified medical expenses.  

Fidelity Investments estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement.

The Morningstar report finds that high-deductible health plans covered 28% of workers in 2021, up from 4% in 2006.

“[For] HSAs as investment vehicles and opportunities for growth for medical expenses, currently, in the near-future and then in retirement, that advantage is less on the table to a certain extent,” says Nations, the report’s author. “That [HSAs have] grown so rapidly and 91% of accounts aren’t using the investment feature means there’s pretty good runway ahead.”

While HSA account providers have significantly improved, since 2017, Nations explains, there remains much room for providers to incorporate best practices. “Most notably, fees could come down across the board,” he says. 

The report finds that the average expense ratio for all funds offered is 31 basis points.

The report also finds that HSAs still have confusing features and needless friction for account holders to invest assets. Among the HSA provider best practices recommended by Morningstar to boost their use, the report urges that providers ditch investment thresholds, reduce fees and continue to cull investment lineups.

Providers’ improvements may effect overall greater use and specially, investment of HSA assets, says Nations. 

“We would like to see more improvement on investment thresholds,” says Nations.

Many HSA providers require account holders to seed the account with cash and meet an investment threshold before investing the assets.

“We think that there shouldn’t be requirements and the best practice would be to not require that,” he says. “A lot of these providers have moved that down to zero or even reduced their investment threshold amount but some still have them and we’re looking to see a little bit more progress on that.”

Nations explains that providers can also improve the process for ‘onboarding’ HSA new user accounts, because many of the products separate the investments from spending features.

“[Many] times [HSA’s are] actually two separate accounts: there is a spending account and the investment account,” says Nations. “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.”

Friction for investing assets may add inertia, blunting account holders’ investing their assets, he adds.

“[There are] these additional hurdles and sludge, that really complicates the process,” Nations says.  “Whereas, in theory, if you opened an account and it offered you access to both right off the bat and made it clear that this was an available option, you might see higher adoption of the investment account and more than 9% of accounts using that feature. There is a benefit to doing it right at the front while people have it fresh in their mind as opposed to ‘oh, I have an HSA but I don’t know how to actually get it set up and invested.’”

Providers have culled their investment menus, as a tactic to improve the user experience, he says.

Large investment menus that offer duplicate strategies, asset classes and strategies may “lead to analysis paralysis, where you’re offering dozens and dozens of funds that overwhelm the end investor [and] nothing gets done,” says Nations.

Whereas Morningstar recommends providers offer between 12 and 24 funds, the average number of investments offered is between 17 to 30 funds, he adds.  

Data & Research October 5, 2022

Deciphering Medicare Costs in Retirement

New research examines differences in spending between the two most popular Medicare plans.

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Health care expenses for retirees can differ for a wide variety of reasons and many Medicare-eligible retirees do not have a clear understanding of how much their health care will cost, what Medicare covers, or what additional options are available.

The Milliman Retiree Health Cost Index examines the differences in Medicare coverage and projects the total premiums and out-of-pocket expenses a healthy 65-year-old can expect to spend on medical and prescription drug costs in retirement across sex, geography, and the two most common coverage options for Medicare-eligible retirees: Original Medicare plus Medigap plus Part D and Medicare Advantage Part D.

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According to the report, the average 65-year-old is expected to spend well over six figures for health care over the course of their remaining lifetime. Though costs can vary, the Original Medicare plus Medigap plus Part D plan is estimated to cost $264,000 for men and $300,000 for women, while Medicare Advantage plus Part D is estimated to cost $137,000 for men and $158,000 for women.

These numbers can be a helpful starting point, but the report warns that there are more factors retirees need to consider to be financially prepared to address their health care needs during retirement.

Most people can not apply for Medicare until age 65, and if they do, they should expect their health care costs to be much higher, the report states. At age 60, a retiree should expect to pay about 53% more for health care expenses over their lifetime than if they were to wait until age 65 and enroll in the Original Medicare plus Medigap plus Part D plan. They would pay about 77% more if they were to enroll in a MAPD plan.

Delaying retirement allows retirees to save more for retirement and continue earning income and employer-sponsored benefits, including health care, the report states. At age 70, a retiree would spend about 28% less for health care expenses than at age 65 for an Original Medicare plus Medigap plus Part D plan. They would pay about 29% less if they were to enroll in a MAPD plan.

Retirees will have to take a variety of health factors into consideration as out-of-pocket costs are also an important part of retirement planning, the report states. Factors to consider include heart problems, arthritis, other chronic or recuring ailments, tobacco use or high blood pressure. Retirees should consider the level of financial risk they could incur by trading off lower premiums for higher deductibles and out-of-pocket costs.

Healthy retirees could expect to spend about 12% less on health care costs for Original Medicare plus Medigap plus Part D plans or 28% less for MAPD plans, the report states. Those with below average health can expect to spend around 18% more on health care costs for Original Medicare plus Medigap plus Part D plans or 45% more for MAPD plans.

Even without any current health issues, it is important to consider that health risk can change rapidly, the report warns. There is always a potential for increased health care spending in the later years of life, especially when faced with a chronic condition or an acute episode such as a heart attack or stroke. Retirees with health issues or are at risk for developing health issues, should consider addressing this budgeting for a below-average health status in retirement.

The report also considers life expectancy and found that living five years longer increased the amount of health care spending by about 40%, while living five years less reduces the amount spent by about 32%.

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