The $60 billion-plus Health Savings Account market is showing signs of evolution, but is still hampered by offerings that are commonly expensive and opaque, according to Morningstar's 2019 Health Savings Account Landscape report.

"The industry is still pretty young," said Leo Acheson, associate director, multi-asset and alternative strategies, and lead author of Morningstar's report.

"There is a big disparity in how much you pay, and room for improvement in other areas," he said.

Morningstar looked at the 10 biggest providers in the retail market. Total fees ranged from 2 basis points (Fidelity) to 69 basis points (Optum). The average fee was 46 basis points.

Total fees include underlying fund fees, investment fees, and maintenance fees. Fidelity is the only provider that does not charge investment or maintenance fees.

"It's essentially free at 2 basis points," Acheson said of Fidelity's HSA. "You are only paying for the underlying fund fee."

Most HSA assets are invested in spending accounts that hold contributions in low yielding cash instruments. Of the $60 billion HSA market, about $48 billion is invested in spending accounts. Fidelity offers the highest interest rate on savings at 1.07 percent.

By contrast, HSA Authority offers a 0.01 percent yield, which earns $0.20 annually on a $2,000 balance, the average among spending accounts.

About those maintenance, investment fees

While the report describes HSA Authority's yield as "paltry," it does note that the fund does not charge maintenance fees.

Maintenance fees cover the cost of administering the accounts. Along with Fidelity and HSA Authority, Lively also does not charge a maintenance fee.

Health Savings Administration charges an annual maintenance fee of $45. Fifth Third charges $42 initially, but it drops as accounts grow, and ultimately hits zero at $4,500. Bank of America and Further charge maintenance fees of $30 and $36.

Eight providers also charge annual investment fees—Fidelity and Bank of America are the only that do not. HSA Authority and UMB Bank charge an annual investment fee of $36.

"Where they are going wrong is with maintenance and investment fees," Acheson said. "It's still a maturing industry. Some are still just trying to figure out how to manage it all."

To underscore that point, Acheson noted that the provider with the largest asset base in the retail market—Optum reported about $3.4 billion in retail HSAs–also costs the most, at 69 basis points in total fees for a 60/40 portfolio built on passive investments.

"You would think there would be economies of scale, but that's not the case," said Acheson.

HSA savers can also be burdened by other fees–debit card replacement, excess contributions, and paper statements are examples. Fidelity and Lively don't charge additional fees. Five charge between two and seven additional fees. HSA Authority does not have a maintenance fee, but charges 18 additional fees.

"For the most part, additional fees are avoidable," said Acheson. "It's an area for improvement."

Solid investments, but sometimes too many

Generally, all of the providers have selected sound investment options.

And while menus are better designed than in previous years, there is room for improvement on that front, said Acheson.

At least 80 percent of investment options at eight of the 10 providers hold a medal ranking with Morningstar. And none of the providers offer a fund with a negative analyst rating.

Fifth Third's HSA has the highest split of actively managed funds, at 75 percent of its menu. Health Equity offers the fewest active funds, at two, and offers strictly Vanguard funds.

HealthSavings Administrators offers 33 funds in its menu, the most among the 10 providers. Health Equity offers 18, the least.

"We'd like to see that number trend down for simplification," said Acheson. "The optimal range is 12 to 24, but you could get away with six."

Morningstar viewed providers' menus in a negative light when there were multiple offerings of the same investment style, or sector-specific investments, such as real estate or health care funds.

Transparency remains subpar

Only five providers evaluated by Morningstar disclose all relevant information, like maintenance fees and interest rates, on their websites.

"It's not always straightforward. On some websites, you look for basic information like a maintenance fee and you can't find it. That makes it hard for someone to compare one fund to another," said Acheson.

Five providers fail to disclose interest rates on their websites; three failed to disclose maintenance fees; two failed to disclose investment fees; two failed to disclose additional fees; and two providers failed to disclose information on investment menus.

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HSA market still evolving: Investment, maintenance fees burden users

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