HSA fees fall, but their use as investment vehicles remains limited

investmentnews.com:

Fees associated with health savings accounts are falling but only a fraction of account holders use their HSAs as investment vehicles — and financial advisors can help turn around the latter trend, experts said.

Morningstar Inc. Thursday released its annual “landscape study” on HSAs, which shows that through the middle of this year, the total amount of assets in HSAs has grown to $116 billion. There are now 21 times more assets in HSAs than there were in 2006.

The study indicated that seven of the top 10 HSA providers kept fees at a low level, and all 10 were rated “above average” on their investment menus. But the survey also found that only 18% of HSA participants are using them as investment accounts despite their tax advantages.

“Overall, the study found HSA features have improved in the past year with several plans cutting fees and offering higher quality investment menus,” Morningstar said in a statement. “However, the industry is still maturing and falls short on several issues like transparency, ease of use, and costs.”

The vehicles offer several tax benefits. For instance, contributions are made on a pretax basis, the fund can grow tax-free and distributions can be taken tax-free for medical expenses. Distributions taken for any other reason than medical expenses at the age of 65 and over are subject to marginal tax rates, like an individual retirement account.

But HSA holders appear to be hesitant to use them as investment accounts.

“The vast majority of HSA holders aren’t taking advantage of the ability to invest their HSA funds,” said Jake Spiegel, a research associate for health and wellness at the Employee Benefit Research Institute. “HSAs are still the Wild West. People are trying to figure out how to use