What's the Right Number of Investment Options in an HSA?
By William Stuart | Originally posted on LinkedIn for by your Health Savings Academy
Does the size and design of the investment menu affect how many Health Savings Account owners invest a portion of their balances?
The number of Health Savings Accounts with invested balances and the total value of investments continues to climb. At the end of 2022, about 7% of accounts, or a total of more than 2.6 million, had a portion of their balances invested in various equities. These 2.6 million accounts held investments totaling $33.8 billion, or just under one-third of total Health Savings Account assets. Investments are projected to grow to $59 billion, representing 40% of assets, by the end of 2025.
What is the ideal number of investments? Recent work published by Devenir Research summarizes the market today and offers insight into design strategy. It found that the average number of investment options increased from 15 in 2012 to 21 in 2017, where it stands as of the end of 2022. That's a healthy increase, but a small absolute number that has remained flat for five years.
Is 21 the right number? Would more investment choices increase the percentage of assets invested? Are there other barriers holding most account owners back?
Barriers to Investing
Why don't more Health Savings Accounts contain balances invested in mutual funds, stocks, bonds, ETFs, and other financial instruments to increase projected long-term returns? Below are some thoughts. The first is documented. The others are more speculative.
Insufficient balances. Devenir's 2022 end-of-year report shows that 62% of all Health Savings Accounts have balances less than $1,000 and 73% less than $2,000. Those figures are important because most administrators require a minimum cash balance of $1,000 or $2,000 before owners can invest. And even without these thresholds, owners who want liquid balances to reimburse their next qualified expense are unlikely to commit a portion of their funds to equities.
Knowledge. Many Health Savings account owners, particularly newer ones (5.3 million new accounts were opened during 2021 and 2022 combined), don't know that they can invest.
Friction. Investing often involves setting up an investment account, perhaps finding the link to a separate investment account, and establishing credentials. That level of work may discourage marginal investors - ones who are interested in, but not dedicated to, building their balances.
Confusion. Experts speculate that far too many younger workers retain too much of their retirement savings in default money-market funds paying minuscule interest because they don't know how to invest. Faced with an overwhelming menu of choices, they fall victim to what's called paralysis by analysis - the tendency to avoid something that looks too complicated.
Changes that affect any of these variables positively are likely to increase the percentage of accounts with invested balances.
Health Savings Account Investment Options
Many Health Savings Account providers offer no investment options other than simple interest because they're financial institutions that offer a Health Savings Account that's no more than a standard checking account with different paperwork. They simplify the investment decision by removing all options except a certificate of deposit. On the other hand, these owners lose purchasing power every year that they retain their balances. Financial institutions typically pay a rate of interest far below general inflation, and medical inflation over time runs at about twice the rate of general inflation.