Thrifty Tony

Cash Drag is Killing Your HSA Investment Potential

HSA investing

This post was originally published on July 16, 2018

A major benefit of having an HSA is that investment earnings are not taxed. An HSA investment account allows you to invest your funds in ETFs or mutual funds. With so many HSA administrators out there, it can be hard to pick the right one.

I spent countless hours online and on the phone with a dozen HSA administrators to find the best HSA provider for investing.  I compiled my findings into this post and ultimately made the decision to transfer my personal HSA funds to a new HSA administrator.

In this post, I explain two elements you want to avoid when choosing an HSA provider:

  1. A required minimum balance in your HSA checking account
  2. Fees charged as a percentage of your investment balance

After understanding why these concepts hurt your HSA investment potential and eliminating HSA providers with these aspects, I review the remaining HSA providers for their pros and cons. Finally, I choose the best HSA provider for investing and reveal which administrator I use for my HSA investing.

TLDR: Lively charges $0 for an HSA investment account. Jump down to the punchline here.

What is Cash Drag?

Cash drag occurs when a portion of your investment is held in cash.  The cash portion causes drag on your potential investment returns. Not only are you not earning returns on cash, but you’re actually losing money due to inflation.

Some HSA administrators have a minimum balance to invest. For example, Bank of America requires you to maintain at least a $1,000 balance in a non-investment account in order to invest your HSA.  In other words, you must always have $1,000 in the non-investment account. Anything in excess of $1,000 can be moved to the investment account and invested.

This may seem reasonable at first, but it’s actually a terrible situation to be in. You see, that $1,000 in cash today is actually worth $15,000 in 40 years when you earn a 7% annual return. So if you think about it, your annual fee for investing with that HSA administrator is essentially $350 per year.

Cash drag is real and unfortunately many people are unaware of its serious implications. It’s very important to consider the missed opportunity cost of not investing that $1,000, both short term and long term.  Therefore, I don’t even consider HSA administrators with a minimum balance to invest.

HSA Administrators with Cash Drag

Now that you know what cash drag is, it should be clear to you that you should avoid signing up for an HSA with a minimum balance to invest. If you are already in this situation, I suggest you read on and transfer your HSA balance to another HSA provider without this restriction.

The following HSA administrators require you to maintain a minimum balance in a non-investment account in order to invest your HSA.

HSA ProviderYearly Account FeeYearly Investment FeeMinimum to Invest
Bank of America$54 ($4.50/mo)$0$1,000
BenefitWallet$42 ($3.50/mo)$34.80 ($2.90/mo)$1,000
Further$12 ($1.00/mo)$18$1,000
Optum Bank$36 ($3.00/mo)$30 ($2.50/mo)$500
UMB Bank$35.40 ($2.95/mo)$36 ($3/mo)$1,000
Avoid these HSA plans with fees and minimums

If you want to maximize your HSA investment potential, do not sign up for an HSA that has a minimum investment threshold. Any amount of your HSA balance held in cash is slowly losing its value over time. Ideally, every penny of your HSA balance should be invested.

HSA Administrators with Investment Fees as Percentages

Getting charged a fee based on your HSA investment account balance is just as bad as cash drag.

Some HSA administrators charge an investment fee as a percentage of your HSA balance. In other words, as the size of your HSA grows, so do your fees. You should avoid these HSA providers as well.

For example, if you have an HSA with a $1,000 balance, you’ll pay $2.50 per year for a 0.25% annual investment fee.  That’s actually a great, low fee. But in a few years when your HSA investment has grown to $80,000, your investment fee is now $200 per year.

In addition to a yearly account fee, the following HSA providers charge an investment fee as a percentage of your HSA investment balance.

HSA ProviderYearly Account FeeYearly Investment Fee
Health Savings Administrators$450.25% (6.25 bps/qtr)
HealthEquity$360.24% (2 bps/mo)
Avoid these HSA plans with investment fees as a percentage of your balance

You should see a big red flag when you come across an HSA administrator that charges an investment fee as a percentage of your HSA investment balance.  Avoid these HSA administrators at all costs.

HSA Administrators with “Reasonable” or No Fees

Now that we’ve eliminated HSA administrators with unavoidable cash drag and investment fees based on your HSA balance, let’s look at some HSA administrators with reasonable fees and no minimums.

HSA ProviderYearly Account FeeYearly Investment FeeBroker
Bank of Cashton$25$0Cetera Investment Services
HSA Bank$30 ($2.50/mo)$36 ($3.00/mo)TD Ameritrade
Lively$0$0TD Ameritrade
Saturna Capital$0$0Pershing
The HSA Authority$0$36Devenir
HSA plans with minimal or no fees

With each of the above HSA administrators, you get a brokerage account.  You are able to invest your HSA dollars in the brokerage account.  Not all brokerage accounts are created equal though.  Some charge a fee for every trade while others are just plain hard to access.  Read on to find out which HSA provider/broker combination comes out on top.

1. Bank of Cashton

At $25 per year, Bank of Cashton HSA fees are right in line with the rest of the HSA industry. There is no investment fee, and you can begin investing right away with no minimums. But don’t go signing up for an HSA with the Bank of Cashton just yet.  There are other fees. Cetera, the broker associated with the Bank of Cashton, charges $14.95 per trade.  Cetera charges this fee for all assets including stocks, ETFs, and mutual funds.

Another huge turnoff with the Bank of Cashton is that you must manually transfer your HSA funds from your HSA checking account to your HSA brokerage account.  I strongly believe in a “set it and forget it” mentality when it comes to investing. Investing should be automatic and not impeded by human emotion or human error. It’s for this reason that I don’t recommend a Bank of Cashton HSA.

2 .HSA Bank

I strongly dislike HSA Bank.  They don’t have a minimum balance to invest, but they charge both a monthly account fee and investment fee.  These HSA Bank fees are actually waived when your account balance for each of these accounts exceeds $5,000. This may sound great, but it probably tricks a lot of investors into maintaining a $5,000 cash balance in order to avoid the monthly account fee.

As you recall from above, this is a terrible idea because of cash drag. Yes, you can save yourself $30 per year, but you’re missing out on investing $5,000.  In 40 years, that $5,000 will be worth $74,872 when you earn a 7% rate of return.  Don’t ever fund your HSA checking account to avoid fees!

Even if you maintain a $0 balance in your HSA cash account and pay the monthly account fee of $2.50, you essentially have the same product as Lively.  With both Lively and HSA Bank, you have access to the same TD Ameritrade brokerage account for $2.50 per month. At that point, it makes sense to have your HSA with Lively because of their simple fee structure.

3. Lively

Lively, the new kid on the block, is a Silicon Valley startup founded in early 2016. As a millennial, I really appreciate the slick and intuitive interface of Lively. Lively’s fee structure is simple because it’s free. That’s right, you pay $0 for an HSA with Lively—even if you want to invest your HSA funds. This is very attractive to both HSA investors and non-investors.

Like mentioned above, HSA Bank and Lively both offer access to the same TD Ameritrade brokerage account.  I don’t see any reason to choose HSA Bank over Lively, especially considering Lively doesn’t nickel-and-dime you and HSA bank does.

4. Saturna Capital

With a $0 account fee and $0 investment fee, Saturna Capital seems like the obvious choice for your HSA administrator, right? And they don’t have a minimum investment threshold so there’s no cash drag. Perfect! Well… not quite.

Intended strictly for investors, Saturna Capital is a bit different than most HSA administrators.  Saturna Capital does not have HSA debit cards or checks. They assume that you are in the HSA investment game for the long run. If there’s even a small chance that you’d like to use some of your HSA funds for a future medical expense, Saturna Capital is not the HSA administrator for you since your funds are virtually inaccessible.

Saturna Capital charges a commission of at least $14.95 to execute most trades. You should not be buying individual stocks in your HSA, but thats a topic for another article. No-transaction fee mutual funds are available, but a $2,500 initial purchase is required and subsequent purchases must be at least $500 per transaction. Finally, if you choose not to execute trades to avoid the commissions, you will be charged between $12.50 and $25 for as an inactive account fee.

Because of their lack of a debit card, mutual fund minimums, and inactive account fee, I do not recommend Saturna Capital as your HSA administrator.

5. The HSA Authority

I refuse to even consider The HSA Authority as my HSA administrator because you must call them in order to transfer funds from your HSA checking account to your HSA investment account. Picking up the phone may be suitable for others, but for me, I want a solution that is seamless and automatic.

Otherwise, The HSA Authority has a reasonable investment fee of $36 per year.  With The HSA Authority, you have access to a wealth of funds including Vanguard funds. All mutual funds are offered as no-load or no-fee to purchase.

Again, I believe in a “set it and forget it” mentality when investing. Because you must pick up the phone to invest your HSA funds, I do not recommend The HSA Authority.

What Is the Best HSA Investment Provider?

If you are interested in investment of your HSA, Lively is going to be the best HSA provider for you. With a competitively low investment fee of $0 per month, no minimums, or other fees whatsoever, Lively is by far the cheapest HSA administrator. Cash drag is not an issue with Lively because there are no minimum balance requirements to invest.

Automating is important when it comes to investing. HSA funds can be automatically transferred from your Lively HSA checking account to your TD Ameritrade investing account. Plenty of commission-free ETFs are available on the TD Ameritrade platform with fantastically low expense ratios.

I have my health savings account with Lively.  I switched my HSA from Lake Michigan Credit Union to Lively. Lively made the process of transferring my HSA effortless.

A feature-rich website, low fees, and no minimum to invest makes Lively the best HSA for investing. I highly recommend opening your HSA investment account with Lively.

Thrifty Tony

Thrifty Tony

Tony approaches most things in life with a budget-conscious mindset while at the same time maximizing investments which results in an ideal balance between spending and saving. And of course he enjoys free things and bonuses every now and then.