More employers are realizing the health savings account’s triple tax-free characteristic makes it a tremendous vehicle for their employees to save for medical costs in retirement, as well as paying current health care costs.
With this change of perspective, employers find that more consideration is required concerning the investment structure and options of their HSA offering. One of the first questions that an employer must answer is whether their current HSA provider offers the investment structure and options that are best for their employees.
So, what are some the issues and differentiators an employer should review when evaluating their provider?
- Threshold – One the first considerations is the provider’s investment threshold? An investment threshold is the minimum cash balance required before an account holder can invest their HSA assets. Investment thresholds range between zero to $5,000, with most providers requiring between $2,000 to $3,000. The appropriate investment threshold from an employer’s point of view will be largely dependent upon the financial sophistication of their workforce.
- Lineup – Who chooses the investment lineup? The options available are different from provider to provider. Some providers offer a pre-selected group of mutual funds, others self-directed brokerage offerings from companies such as TD Ameritrade or Charles Schwab, and/or open architecture (mirror planning).
- Risk profile – What should be the risk profile of the HSA investment lineup? The purpose is to pay current and future health care expenses. Therefore, should investments of both higher and lower risk be made available? When will the funds be needed to pay for health care expenses? The timeframe is a critical determinant of risk tolerance and should be considered carefully.
- Brokerage – What is the risk and reward of offering the option of a self-directed brokerage? Self-directed brokerage provides employees with access to thousands of fund choices and therefore is the most customizable investment option for an HSA. But does an employer wish to provide this level of independence for an account that exists to pay for such an important expenditure as health care? Again, the employer will likely consider the financial sophistication of their workforce in weighing this important decision.
- Mirror – Does it make sense to mirror the investments in the HSA with that of the company’s 401k? There might be tangible benefits to having the investments options in the HSA be identical or similar to that offered with the 401k. One potential benefit is that participant education and communication will be easier and less confusing.
There is no one-answer-fits-all to any of these questions or decision points. A holistic solution for employers may be to develop an investment policy statement for their HSA. With the assistance of trusted financial adviser/consultant, employers can take lessons learned through their due diligence on the 401k and apply that to the HSA.