Managers tout holistic approach for role of HSA

As a newcomer to health savings account investing strategies, Dimensional Fund Advisors sees a significant marketing opportunity.

“I look at HSAs as where 401(k) plans were in the 1980s,” said Tim Kohn, vice president and head of defined contribution services, meaning that participants and sponsors require more education about the investment/savings opportunities with HSAs.

“Sponsors need to include the HSA message into their whole retirement message,” he said. “Communicate this as a retirement benefit plan.”

Dimensional Fund Advisors, Austin, Texas, began offering 22 investment options — from a target-date series to stand-alone equity and fixed-income funds — to HSAs in January.

One factor suppressing the growth of HSAs as an investment vehicle is that most HSA administrators are banks, Mr. Kohn said. “Most banks want a deposit — $2,000 or $3,000 or $5,000 — before they offer mutual funds.”

Dimensional offers its investment options to HSAs run by HealthSavings Administrators, Richmond, Va., and those bank-type restrictions don't apply. “HealthSavings Administrators offers "dollar one investing,' where there are no minimum AUM requirements in order to invest into a mutual fund,” he said.

Mr. Kohn's firm only provides its HSA investment options through HealthSavings Administrators. Unlike many HSA investment options elsewhere, Mr. Kohn's firm offers institutionally priced shares.

Many HSAs require participants to keep a certain amount of money in a liquidity option so they can easily draw down the money to pay for the medical expenses. Mr. Kohn said HealthSavings Administrators “offers a checking account-type interest bearing account, also with no minimum investment.”

Fidelity Investments, Boston, has been in the HSA administration and HSA investment option business for 10 years, and it, too, preaches a holistic approach to HSAs' role in retirement planning.

“We view HSAs as fitting into a bigger picture,” said Eric Dowley, senior vice president of Fidelity's HSA business, based in Smithfield, R.I. Fidelity only sells its HSA service to its retirement plan clients. “Our clients are interested in HSAs as an important component of overall benefits,” he said.

By year-end 2015, Fidelity had 184 HSA clients, many of which are among defined contribution plans with assets of $1 billion or more. The number of clients climbed from 115 in 2014, while the number of participants grew to 356,000 from 267,000, and HSA assets grew to $1.1 billion from $811 million.

Investments account for about 21.2% of the HSA assets, higher than the industrywide average of 14% identified in a survey by Devenir Group LLC, an investment adviser and consultant in the HSA business. “That comes with time as people become more comfortable with how it works,” Mr. Dowley said.

The investment options in its HSAs are those from Fidelity's self-directed brokerage account — a range of mutual funds, exchange-traded funds and stocks. From this lineup, participants can choose funds outside of Fidelity.

Fidelity doesn't impose a minimum account balance before a participant can make an investment. “You can get invested at "dollar one,'” Mr. Dowley said.

Because HSAs are individual accounts, participants must pay a retail price, he said.

Fidelity's internal research shows that after five years, participants making investments in their HSAs had balances ranging from four to 10 times more than participants “just sitting in cash,” Mr. Dowley said.

As an asset manager, Bank of America Merrill Lynch offers 26 mutual funds to HSA plans run by the company's HSA administration business.

Among those 26, approximately 30% of the funds are institutionally priced shares while the rest are retail, said Robert Kaiser, the Dallas-basedhead of sales for health benefits solutions at Bank of America Merrill Lynch. As HSA balances grow, Mr. Kaiser predicted his company will offer more institutionally priced shares.

There's no minimum amount required within each investment option, but Bank of America Merrill Lynch requires a contribution of $1,000 into a participant's HSA cash account before allowing contributions to investment options. “However, we are flexible to adjust to the plan sponsor goal,” he added.

A company spokeswoman declined to provide information on the amount of HSA assets or number of clients.

Like his peers, Mr. Kaiser said sponsors shouldn't underestimate the amount of education that participants need — or want. “Employees are asking for more help in financial wellness,” he said. “Sponsors have to find better ways to educate them.”

He said employers can improve participation in HSAs' investment options by contributing money to the accounts by linking the money to employees achieving wellness goals such as exercising.

A recent Bank of America Merrill Lynch survey, he added, underscored the need for more education. For example, the company found that 55% of HSA account holders usually spend their entire balance within a calendar year while 53% considered HSAs to be a way to cover short-term health costs rather than as a long-term savings vehicle. n