Unhealthy Health Savings Accounts

To the millions of aging workers sweating the prospect that health care costs could wreck them financially later in life, health savings accounts are something of a godsend. Established under the Medicare Act of 2003, they enable families to sock away savings pretax (up to $5,950 this year) and then withdraw that money and earnings on it tax-free for medical expenses.

At last count 8 million participants had $10 billion in HSAs. That figure will rise to $71 billion within five years, figures Eric Remjeske, president of Devenir Group, a Minneapolis consultant to HSA plans. He forecasts that a seventh of the dollars will be in balances large enough that the HSA operator can offer mutual funds as an investment option. A typical plan has $2,000 as the minimum for that feature.

How can you lose? By having your HSA's tax advantages negated by high money-management fees.

Early on HSA balances were handed off by health insurers to partner banks. Many paid risk-free interest rates of around 4%. HSA rates have since fallen by half. The fund option begins to look attractive. But there is a tendency for the fund choices to be based on who offers the best deal--to the plan's managers, not to participants. With your 401(k) your employer has a legal obligation to put your interests first. With HSAs no such standard of care applies.

UnitedHealth Group controls roughly 15% of the market for HSAs, which it offers through OptumHealth Bank, a wholly owned subsidiary. Until late last year its HSA clients had 11 mutual fund choices from Vanguard Group. Annual fees ranged from 18 cents to 35 cents per $100 invested.

By late 2008 Optum had yanked the Vanguard options for new customers. Funds on the menu now hail from firms like Munder and Thornburg; fees range from 76 cents to $1.37 per $100.

Why the switch? No coincidence, perhaps, that regulatory changes this January enabled entities like OptumHealth and their consultants to start pocketing a cut of fund management fees. Nor, perhaps, is it purely random that many fund firms popping up in HSAs these days kick back fees to plan managers. Vanguard does not pay kickbacks.

UnitedHealth, OptumHealth Bank and Remjeske, their consultant, decline to say how they divvy up fees. WellPoint, another Remjeske client, started offering HSA funds in April via two-year-old Arcus Financial Bank, with six of its seven Arcus funds paying such fees (two of which have since suspended payments because of market turbulence, Remjeske says).

"Revenue sharing doesn't even cover our recordkeeping," Remjeske pleads. "It only helps keep the cost down."

He's got a point. Given the paperwork, the puny balances most savers have in their HSAs are hardly a gold mine. But whatever the economics at the moment, there's cause for concern about weak disclosure, lax legal oversight and high fees on savings that people are counting on to keep their pill bottles filled in old age.

The conflicts of interest can get pretty thick. Aetna and Cigna rely on JPMorgan Chase to select mutual funds for their HSA customers. The result: a stable of funds run mostly by--surprise--JPMorgan. Joseph Mondy, a Cigna spokesman, declines to comment on compensation between Cigna and JPMorgan. Aetna and JPMorgan are mum about their deal.

The good news is there's a way for some HSA participants to avoid this fee-palooza. Some insurers provide self-directed accounts to customers with certain minimum balances. Blue Cross of Minnesota offers a Charles Schwab account for participants with at least $10,000 in their HSAs. For a $10-to-$20 trading commission participants can buy low-cost exchange-traded funds. Alternatively, they can pay a sales load or a $5 fee to get into a mutual fund from a menu of funds costing 60 cents to $2.25 a year (per $100) in expenses.

Another option: Transfer your HSA assets to Health Savings Administrators, a firm in Richmond, Va. that was one of the original operators of HSAs. It is currently Vanguard's only HSA partner and offers 22 Vanguard funds, with expenses per $100 ranging from 9 to 61 cents. It costs around $25 to transfer HSA assets from one operator to another. The rub is that your personnel department probably won't permit your HSA assets to be deposited there initially, so you'll have to pay to have them transferred on a regular basis.

Another risk is that HSAs could be pared back before balances get big enough to make choices really important. Some Democrats argue that the tax break is a luxury for the healthy and wealthy. One proposal knocking around would limit pretax contributions from the current $5,950 to no more than each plan's annual deductible, which could be thousands of dollars less.

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