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The Best Health Savings Account

Fidelity's plan takes the top spot on our list, whether you're using it as a savings or an investing vehicle.

[Editor's Note: This transcript includes a correction to the audio regarding the example of Fidelity’s all-in cost.]

Christine Benz: Hi, I'm Christine Benz from Morningstar. Morningstar's latest research on health savings accounts has revealed a new top choice. Joining me to discuss the latest research is Leo Acheson. He's an associate director in Morningstar's Manager Research Group. Leo, thank you so much for being here.

Leo Acheson: Of course. Thanks for having me.

Benz: Leo, let's talk about health savings accounts, really generally before we get into the research on the top health savings accounts. Why should someone consider a health savings account, and also who can consider a health savings account?

Acheson: Health savings accounts can be used in a couple of different ways. They're a tax-advantaged way to pay for your medical costs. So it's actually the most tax-favored vehicle in the tax code. Money goes in tax-free, grows tax-free, and you withdraw it tax-free as long as it's spent on medical costs. So really, it can be used for people that want to use it to cover their current medical costs or also to save and invest for future medical costs down the road, which are likely in retirement.

Benz: And that's how you can really begin cooking with gas with the long-term tax benefit if you actually don't touch the HSA funds and let them grow and take advantage of that tax advantage over a longer time frame.

Acheson: That's exactly right. Yes. You get the most benefits that way.

Benz: Importantly though, you can't contribute to an HSA unless you're covered by what's called a high-deductible healthcare plan. Correct?

Acheson: Right. That's right. You have to be in what the IRS considers a high-deductible plan.

Benz: When you and the team approach health savings accounts and try to rate them, you assume two use cases. One is the first that you outlined where you're kind of using it as a spend-as-I-go type vehicle--I'm using it to defray ongoing healthcare costs. So what are the key things you're looking at when you evaluate HSAs from that standpoint?

Acheson: From that standpoint, you're essentially putting money tax-free into, like, a checking account. So there are a couple of main considerations. The main one is the maintenance fee. So what maintenance fee are they charging? It's usually a monthly fee. Among the providers that we looked at, three do not charge a maintenance fee, so it's essentially free, and the other eight charge fees ranging from about $30 to $50 a year. So that's really the main consideration.

Then on top of that, we also look at interest rates that are offered on those checking accounts, which have been really low for a long time, but actually this year, one provider really stood out with a much higher yield than some of its competitors. So it actually became a meaningful differentiator, so that was also another component that we looked at.

Benz: Let's talk about the top-rated HSAs for people who want to use them, use the account, as kind of a spend-as-they-go vehicle. You've got Fidelity on top. Let's talk about that because, if I'm understanding correctly, hadn't previously rated Fidelity.

Acheson: That's right. Within the past year, Fidelity opened up its HSA to individuals. Before they only offered it to employers so that's why we included it in our analysis this year. They essentially offer their HSA for free. There is no maintenance fee, and their interest rate is significantly better than all the other plans that we looked at.

We looked at 11 plans from a spending account perspective. If you consider the average checking account balance of about $2,000 in an HSA, Fidelity gives you a yield of 1.07%. The next best provider would give you about 0.25% on $2,000.

Benz: So that's quite a meaningful advantage.

Acheson: Right.

Benz: So a couple of others you like for spenders would be Lively and HSA Authority. I assume kind of similar situations there.

Acheson: Right. Neither of them charge a maintenance fee. Lively's interest is better than all the other peers besides Fidelity. And then the HSA Authority has a lower interest rate. And one other thing to be careful with at the HSA Authority is they have a few additional types of hidden fees that can catch you off-guard that usually are very avoidable, such as if you contribute too much or if you request paper statements instead of electronic statements. That's why they didn't really impact our evaluations, but those types of fees aren't present at Fidelity and Lively, so that gives those providers an advantage over HSA Authority.

Benz: HSA Authority had been our top pick up until this year.

Acheson: Correct.

Benz: Let's take a look at HSAs from another use case. This is for someone who wants to take maximum advantage of the tax-free nature and let the account build and get it invested in some long-term investments. Here again, Fidelity looks really good. Let's talk about that.

Acheson: So when we look at these providers from an investment perspective, we look at four main components: How good are the underlying investment strategies that they're offering? What's the design of the investment menu? So, is it straightforward and easy for someone to navigate--relatively concise? We also look at, of course, the fees that they charge. And on top of that, whether or not there is an investment threshold. Some of the providers require you to keep money in the checking account before you can invest. So naturally if you want to invest this money, that can create an opportunity cost where you're earning a small percent on the checking account balance.

So those are really the four main considerations that we looked at.

Benz: Fidelity, though, emerged as the top pick for the investors as well.

Acheson: Again, yeah, Fidelity is by far the best choice among the ones that we looked at. They do not have a fee if you want to invest either. Their investment menu is pretty strong. They have a good number of strong offerings. They allow you to invest your very first dollar, so there's no investment threshold. So all of those aspects set it apart. Mostly the avoidance of fees is what really sets it apart from its competitors. So for instance, you can--if you want to buy a passive 60/40 portfolio, you have to consider an average account balance because there's dollar-based fees. So if you want to, if you convert an average account balance of $13,000, which is average across the ones that we looked at, for a passive 60/40 portfolio, you pay an all-in cost of 2 basis points at Fidelity.

The next best provider is Bank of America where you pay about 30 basis points. Then it ranges all the way up to almost 70 basis points at the most expensive provider.

Benz: That's a big differential. So Bank of America, though, and HSA Authority, both rank among the top, not quite as good as Fidelity, but nonetheless still good choices.

Acheson: That's correct. Yeah, versus the average, they're less expensive--whether you're looking for active or passive exposure, they're less expensive than the average. The HSA Authority doesn't require you to keep money in the checking account, and  Bank of America and HSA Authority also have good investment lineups.

Benz: So a question is, if someone's watching this, they might say, "Well, my HSA provider at work is not the ones that you've just talked about." There's a workaround, right, that you can periodically, you can contribute through your employer's HSA. Let's talk about that.

Acheson: So if you're not happy or satisfied with the offering at your employer, you can contribute to that HSA--your employer's HSA--receive the company match if they offer one and also receive the FICA tax benefits that you get from contributing to your employer HSA, and then shift that money over to a provider of your choice. So in this case, Fidelity would be a pretty good option.

Benz: The good news is a lot of people may already have Fidelity accounts set up for their IRAs or whatever it might be, so they might already have money there.

Leo, this is great research. Thank you so much for being here. It's always great to hear about your latest findings.

Acheson: Of course. I had a great time talking with you. Thanks.

Benz: Thank you. Thanks for watching. I'm Christine Benz from Morningstar.com.