We recently released a white paper outlining best-practices related to HSA menu design we have developed over the past 15 years of designing menus for HSAs. An important aspect of the menu design process is sizing the menu to optimize the availability of core asset classes while also limiting excessive overlap or overly risky asset classes that can overwhelm the typical investor. This blog considers four important factors that impact sizing decisions of HSA menus.
The case for limiting the number of funds on a menu often stems from research in retirement plans, some of which has shown investors may respond to overly large investment menus through lower participation rates, or greater acceptance of the default investment option1. However, we believe HSAs aren’t subject to some of the limitations of retirement plans as a result of several key factors associated with the HSA marketplace:
1) Accountholders are not automatically enrolled into the HSA investment account
- HSA plans may see lower default utilization simply because accountholders need to take individual action to invest. The effects of this are likely to include lower default utilization as well as potentially lower number of participants investing2.
2) HSA account holders have been shown to exhibit high levels of consumerism3
- High levels of engagement suggest the population of HSA accountholders is better equipped to navigate investments than a typical investor.
3) HSAs have a cash component
- HSAs do not offer a qualified default investment alternative (QDIA) such as Target-Date funds in retirement plans and instead generally default unallocated investments into money market funds. A retirement plan investor may view this as a negative, however HSA investors often prefer a low risk profile investment over low-interest cash savings. We see this as the utilization of target-date funds in HSAs is relatively low compared to money market funds.
4) HSAs investors often have previous investing experience
- Most HSAs are workplace benefits and thus participants often have had previous access to retirement benefits.
Considering these factors, the typical HSA investor may be likely to have some level of previous investing experience, is actively choosing to invest their health savings on their own and recognizes the unique benefits of HSA investing.
1 Iyengar, Huberman, and Jiang, “How much choice is too much: determinants of individual contributions in 401(k) retirement plans,” in O.S. Mitchell and S. Utkus, Editors, Pension Design and Structure: New Lessons from Behavioral Finance, Oxford University Press, Oxford, pp. 83-95, 2004.
2 Devenir Research, “2019 Midyear HSA Market Statistics & Trends”, August 2019. https://devenir.com/research/2019-midyear-devenir-hsa-research-report/
3 Alegeus, “2018 Alegeus Consumer Health & Financial Fluency Report”, 2018. https://www.alegeus.com/insights/research-reports/consumer-health-and-wealth-fluency-report
Investments are not FDIC Insured and may lose value. The information above is intended to be used for educational purposes only and is not to be construed as investment or tax advice, or as tailored to any specific investor. Consult a financial advisor or tax professional for more information. Data used may be estimates and may not reflect actual observed data.