If you’ve decided to offer your employees the option to invest their Health Savings Account (HSA) contributions, you’ve made a very important step towards supporting their financial health. That’s because the HSA can be used to save for immediate and future health needs, as well as retirement. And by allowing your employees to invest their savings, you’re helping them to build those account balances faster.

According to Devenir, the average HSA balance for accounts greater than $0, was $4,771 at year-end 2023. But the average balance for HSA investment accounts was $19,212. According to Devenir’s year end report, in 2023 HSA investment assets grew 37%, totaling $46 billion at the end of the year.

An HSA with the option to invest is popular among employees and can be extremely beneficial to their financial wellbeing. But the investment options that are offered must be well-designed and meet employees’ financial literacy levels as well as help them meet their financial goals. In this post, we’ll walk you through how to craft an HSA investment plan that checks all of these boxes.

Investment options within an employer-sponsored HSA

How employers design their HSA investment menu can influence how well the plan performs. They need to take into account the following components: 

• The size of the menu.

• The asset classes offered.

• The product mix that is offered (i.e. active vs. passive funds).

• Investment cost and fees, including if there’s a minimum balance to invest or are there monthly or yearly fees. 

Menu size

There are pros and cons to large menus and small menus. According to Devenir, the ideal menu size is 15-30 funds, but some employers might find that it’s better for their employee demographic to offer more or less. The menu the employer ultimately decides on should reflect the wants and needs of the employee demographic they have. They should take into consideration the employer’s objectives (e.g. cost-reduction), financial literacy of the employees, the technology platform the plan administrator is using, and what employees (both current and prospective) say they want.

For example, employees with low financial literacy might feel overwhelmed with a large investment menu that includes complex products and they might respond with low participation rates or by selecting the default option. Alternatively, a self-driven investor with high financial literacy might want the option to customize their investment portfolio and would benefit from a brokerage window. 

Employers want to strike the balance between overwhelm and a lack of diversity (which can hamper the plan’s success and make their benefits package less competitive). 

Asset classes

In order to craft a diverse but efficient portfolio of investment options for employees, employers must be thoughtful about the funds they add. They should prioritize broad asset class coverage over a depth of options in any one asset class, and ensure each fund is complementary to each other. Employers want to minimize duplication of investments across funds. 

Examples of asset classes are:

• U.S. Large cap Equity Funds

• U.S. Mid cap Equity Funds

• U.S. Small cap Equity Funds

• Emerging Market Equity Funds

• Target-Date Funds

• Alternative Assets

• Specialty Bonds

Different asset classes will require different levels of education and technical support for employees to be successful.

Product mix

When we talk about the types of products that the investment menu offers, we will divide them into passive and active investments. Examples of passive investments are index funds and exchange-traded funds (ETFs) that allow investors to achieve a diverse portfolio without needing to conduct a lot of research to individually pick each investment.

Active investments can be funds that are managed by a person (i.e. a fund manager) that buys and sells investments within the portfolio based on information they have and market forces. Or, an active investment can be the act of buying and selling individual investments by the account holder.

Passive investments can help investors contain costs and hold on to more of their gains because they’re not paying a fund manager, while active investments can provide better downside protection during market corrections. HSA investors currently hold more active assets than passive (52% to 48%). But employers should consider the demographic makeup of their specific employee base when choosing the product mix for their investment options.

Investment costs and fees

Be sure to review what investment options charge for accessing their services. Costs and fees can include: 

• Minimum account balances for investing

• Annual or monthly account maintenance fees

• Investment access fees

• Commissions

• Trading fees

If fees are too high, your employees can miss out on some of the long term benefits of investing their account or may be discouraged from investing altogether. Look for investment options that offer low fees and no minimum account balance required for investing.

Best practices for employers

For employers to offer a popular, beneficial, and cost-effective HSA with investment options, they must tailor their plan and work with a provider that meets their needs and the needs of their team. Here are the best practices for employers to develop a highly effective HSA that includes investment options.

1. Seek employee feedback

If your company already offers your team an HSA with investment options and you’re in the process of redesigning the plan, survey your employees to see learn the following:

• If they use your current platform’s investment options.

• If your HSA platform makes investment options easy to understand and access.

• How active they are in their investment management.

• If they have any pain points or questions about investing their HSA balance.

Compare the survey results with plan utilization data.

If you’re offering an HSA with an investment option for the first time, use the survey to gauge employees’ financial literacy, what investment experience they have, and their goals for their HSA account. For example, are they viewing it more as a short-term spending account or a long-term savings account? You want to get a sense of not only what they want, but how you can help them be successful.

2. Offer a diverse range of investment options

One of the biggest advantages of an HSA is that it has varying uses: To save on immediate and near-term expenses, and to save for long-term expenses in retirement. When it comes to thinking about the investment for an HSA, you can think of HSA investing like a 401(k)+. That’s because the 401(k) has a single focus: To earn as much money as possible over the long term. 

Because you want to help your employees plan for the long term, you want your HSA’s investment menu to be complex enough that employees are able to build a quality and diverse portfolio. You also want to make sure there’s options for HSA account holders who are less experienced when it comes to investing and that enable them to ease into it. For example, you should offer a guided portfolio option, which picks a mix of funds based on an account holders’ risk tolerance. This is a great choice for employees who want to invest their HSA, but are less experienced, or don’t know which funds to pick. 

It can be helpful to remember that according to Devenir, HSA account holders have been shown to exhibit higher levels of consumerism than the general public. They’re more engaged in their healthcare and cost decisions and tend to make savvier choices. That means HSA investors are likely to be more financially literate and capable of navigating more complex investment choices. 

3. Regularly review and update investment options

To make sure you have the most efficient and effective HSA investment menu, you want to keep tabs on plan utilization and growth rates. You’ll want to track data within the plan as well as survey employees regularly. You want to make sure they’re engaged, the platform is easy to use, the plan is easy to navigate and that they feel satisfied with the current investment mix.

4. Provide appropriate education and resources

In order for employees to feel confident in investing their HSA money, they need high quality, easy-to-understand resources. These resources could be provided by your HSA provider and explain why account holders might want to invest their HSA, how investment can help them reach their financial goals, and breaks down the different investment options that are offered, including any applicable fees for investing. You could also include calculators and financial planning tools to help your team make the best decision for their accounts. 

5. Look for a plan administrator with an easy-to-use platform and transparent fees

Even a highly motivated investor will lose interest in engaging with the plan if the HSA administrator’s platform is clunky and difficult to navigate. You also want to pay attention to fees. High fees and minimum balances can deter account holders from investing their HSA balance. Some platforms require a minimum balance before account holders can invest. You want a platform that makes the following easy for the employee:

• Determining investment options.

• Finding out information on each investment.

• Understanding any fees associated with the investment account or if there is a minimum balance to invest.

• Transferring money to their investment account.

• Investing their money.

• Determining how well their investments are doing.

• Selling investments.

• Determining how to use their account to achieve long-term financial goals.

The platform should make the following easy for employers:

• Determining plan engagement.

• Determining the success of the investment portfolio.

• Determining cost and fees.

• Adding employees to the plan.

• Educating employees.

• Removing employees from the employer-specific plan and rolling employees over to an individual HSA account. 

6. Communicate the benefits of HSA investing

Although investing HSA contributions has become more popular in recent years, many employees might not even know it’s possible. In addition, they might not be aware of the benefit of investing their money to potentially help them grow their savings at a faster rate. As part of employers’ education campaign during and after open enrollment, employers should emphasize the following:

• The triple-tax advantage that HSA contributions enjoy: they’re contributed tax-free, they grow tax-free (even in an investment account), and they’re distributed tax-free when used for qualified medical expenses.

• Employees get to keep their contributions and earnings until they need to spend them. Even if they leave their employer or are no longer covered by a High Deductible Health Plan (HDHP).

• Contributions that are invested can grow at the rate of the market, which has varying rates of return, but generally average to approximately 10%. 

Get started with Lively today

Lively offers two types of investment options for HSA account holders: a guided portfolio is tailored for the hands-off investor, and the self-directed portfolio for the hands-on investor. We have transparent fees and no minimum HSA balance to invest. Our platform is designed to be intuitive and features built-in account holder education and top-rated customer service for both account holders and administrators. If you’re ready to offer your team a popular benefit that helps them afford healthcare costs today and save for the future, reach out to Lively today.