As health savings accounts take on greater investing opportunities, providers are employing strategies designed to overcome some restrictions that don't affect traditional DC plans.
Some have investment lineups with more options than DC plans, many of which have been trying to trim investment menus in the name of simplicity. The larger menus can be justified because HSA investors are subject to different rules and exhibit different investing attitudes, said Eric Remjeske, president and co-founder of Devenir Group LLC., a Minneapolis-based HSA research firm and provider of investing services.
For example, HSAs cannot offer collective investment trusts, which are permitted for qualified retirement plans under ERISA, he said. HSAs are not subject to ERISA.
Among DC sponsors offering investments in HSAs, 96.5% offered mutual funds, 18.8% offered self-directed brokerage accounts and 3.5% offered certificates of deposit, according to a June survey of 189 sponsors by the Plan Sponsor Council of America. Multiple responses were allowed.
Unlike DC plans, participants cannot be automatically enrolled into an HSA. There's no qualified default investment alternative for HSA investment accounts, which means unallocated investments are likely to be placed in low-interest money market funds, he said. While auto features can nudge DC plan participants to increase their investment accounts, HSA investors must initiate such action, which could result in lower use, he said.
And because some research shows HSA investors to have greater financial knowledge than the general public and probably have had some investing experience, a larger menu might encourage greater participation, Mr. Remjeske said.
However, offering larger menus invites criticism because "bigger menus will confuse" participants, said Leo Acheson, director of multasset ratings at Morningstar Inc., Chicago. He is concerned not only about "decision paralysis" but also the risk of big HSA menus containing too many overlapping investments.
A Morningstar research report looked at 10 large HSA providers, finding that their lineups ranged from 17 to 33 options. Morningstar counts a target-date series as a single option and categorizes a target-risk series the same way. Only two providers received positive scores based on Morningstar's methodology that analyzes the presence of overlapping investments, the use of niche strategies and the breadth of styles such as passive vs. active. Even some of smaller lineups were chastised for, among other things, offering virtually all index funds or too many sector funds.