Providers offer workarounds for HSA restrictions

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.

A few years ago, HealthSavings Administrators offered "well over" 100 investment options, said E. Craig Keohan, chief revenue officer for the Richmond, Va.,-based firm. The firm has cut the lineup to 35 individual options plus a seven-fund target-date series.

"Our team chose the funds based on what had historically been most popular within our account base and then balanced (them) out across asset classes," he added. The HSA lineup features primarily institutionally priced shares and a combination of passive and active options. The weighted average cost is 11 basis points, he said.

About half of its 80,000 account holders are in employer groups and the other half are individuals. HSA assets are about $1 billion. A whopping 89% of HSA assets are in investments tracked by Devenir. The company doesn't break out institutional vs. individual investing.

Account holders can invest immediately; they don't need to have a certain amount before investing. If a client is large enough, the firm would, on a case-by-case basis, create a custom lineup to match its 401(k) plan offering. "Employer groups are generally very pleased with our lineup because of access to institutional-grade fund shares," Mr. Keohan said.

When UMB Bank, Kansas City, Mo., began providing HSA services, it offered a self-directed brokerage to account holders. "People said it was too overwhelming," said Duane Fischer, senior vice president, HSA implementation, at UMB Healthcare Services, a unit of UMB Financial Corp.

Four years ago, UMB Bank, also part of UMB Financial, shifted to a specific investment list. It has 18 mutual fund options plus a four-fund target-risk series and a 12-fund target-date series. The list includes investments from several asset managers and contains passive and active options. The investments are chosen by the UMB's trust department.

UMB also requires participants to have a balance of $1,000 before investing because the company is concerned about medical emergencies that could force participants to sell investments without that $1,000 cushion, Mr. Fischer said.

UMB has about $3.7 billion is HSA assets with approximately 20% going to investments. It offers HSAs to more than 10,000 clients with nearly 1.57 million accounts.

The website of Further, formerly known as SelectAccount, says HSA participants must have $1,000 in their accounts before they start investing. They can choose from 22 mutual funds plus a target-date series, all of which are selected for Further by the investment advisory unit of Devenir, the website said.

The website lists the gross expense ratios for the mutual funds ranging from 4 basis points to 119 basis points. It features index and actively managed funds from several investment managers.

When a participant's HSA account exceeds $10,000, the participant becomes eligible to invest in a Charles Schwab & Co. self-directed brokerage account featuring more than 2,500 mutual funds plus stocks, bonds and other investments.

"While we have members who are leveraging their HSAs as an investment tool, as the cost of health care continues to rise, we are finding that a majority of our members are actually spending down their HSAs each year in order to pay for care today," Kari Soderberg, a spokeswoman for the Eagan, Minn.-based Further. She declined to discuss strategy or details about its operations.

The role of HSA specialty firms as the primary source of HSA investing is reflected in the June survey by the Plan Sponsor Council of America of 189 sponsors. When asked who determines the investments, 91.4% cited the HSA specialty firm vs. 3.9% for the sponsor and 4.6% for "other."

The survey also found little coordination in investments between a sponsor's HSA lineup and its DC lineup. Just 2.7% said their HSA menu was the same as their DC plan menu.

Because DC plans play by different legal rules than HSAs, "it would be unusual" to see a 401(k) plan and an HSA offer identical investment choices, said Jack Towarnicky, Columbus, Ohio-based principal researcher for PSCA and the association's former executive director.

Several executives of HSA providers said they have seen little or no demand for so-called mirrored investment menus. "Most clients have chosen not to accept the risk associated with mirroring the offerings because they don't want to assume the responsibility of being a fiduciary" for HSA investments, Matt Richardson, senior vice president of health-care services at UMB Bank, wrote in an email.