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Expense Ratios: The Silent Killer Of HSA Retirement Investments

Expense Ratios: The Silent Killer Of HSA Retirement Investments


$404,000. That’s the amount of medical costs the average couple retiring in 2018 at age 65 could be liable to pay … without help from Medicare. And if you pay for those expenses out of your 401(k), you’ll end up shelling out an extra $134,000 once you factor taxes in. Luckily, by opening an HSA and investing your funds instead of spending them, you can build a medical-specific nest egg for those healthcare costs.

Remember, HSA funds go into your account tax-free or tax-deductible, and interest and earnings grow tax-free as well (in almost every state). And when you withdraw funds from your HSA to pay for a qualified medical expense, those funds come out tax-free, unlike a 401(k). If you’re serious about putting money away for retirement healthcare costs, investing your HSA funds is the hands-down best way to save.

Most investors know the impact market return can have on their investments; we only need to look back to 2008 for a sobering reminder. Also, most HSA accountholders know to compare administrative and custodial fees when deciding which provider to use. But there’s another often-overlooked factor that, over time, can put a huge dent in your hard-earned savings. Let’s learn about expense ratios and the effect they can have on HSA retirement investments.

What Are Expense Ratios?

An expense ratio is the fee is taken out of your investment account annually by your fund company to cover the cost of operating the fund. Typically, expense ratios are measured as a percentage of the total funds in your account. If you have $10,000 invested in a fund with an 0.75% expense ratio, you’d lose $75 from your account that year. For instance, if you had a 6% return for the year ($600), that year’s net return will only be $525 ($600 – $75).

Since expense ratios are deducted from funds’ returns rather than being charged as separate bills, they’re very easy to miss. Because of this, many people forget to take them into account when comparing HSA providers. However, as we’ll see below, expense ratios are by far the most significant cost HSA investors will face over the lifetime of their investments.

Expense Ratios’ Hidden Impact

Couple 1 (we’ll call them Jack and Jill) got married when they were each 25 and opened separate HSAs from HealthSavings that same year (choosing funds with expense ratios of 25 basis points, which is a quarter of a percent). They’re under a family health plan, and every year they put that year’s maximum contribution limit into their HSAs. When they turned 55, they each contributed the maximum catch-up contribution limit of $1,000 into their accounts (an annual total of $2,000). When they turned 65, they enrolled in Medicare and stopped contributing to their accounts; they contributed to their HSAs for a total of 41 years.

Couple 2 (we’ll call them Bonnie and Clyde) did everything the same as Jack and Jill, but with a couple differences: they chose a different HSA provider and picked funds with expense ratios of 35 basis points instead of 25. One-tenth of a percent can’t be a big deal, right? Let’s see. Over 41 years, that difference of 10 basis points in expense ratios turned into over $38,000 less in Bonnie and Clyde’s accounts.

And Bonnie and Clyde’s expense ratios were below the average; the average expense ratio for HSA funds is actually 65 basis points. If Bonnie and Clyde had invested in funds with expense ratios of 65 basis points, they would had seen over $148,000 less over the course of their accounts than if they’d opened HSAs with HealthSavings, like Jack and Jill did.

How does this happen? Even though the difference between two expense ratios may seem insignificant, higher expense ratios chip away at your annual return, giving you a little less in your pocket each year. And as your account grows over the years, that difference increases at a faster and faster rate. And the worst part is, because expense ratios are usually deducted from your returns rather than charged as a separate bill, you might not even know how much money a higher expense ratio is costing you.

If you’re investing your HSA funds, always, always make sure you understand the expense ratios for the funds you’re choosing. Also, if you’d like to compare how much money different expense ratios will cost you in the long run, here’s a great calculator to use.


At HealthSavings, we’re proud to offer some of the lowest expense ratios on the HSA market. We think everyone should have the chance to build a more secure retirement with their HSAs, and our expense ratios reflect that vision. To see our expense ratios, view our investment options and click into a fund family, then click “Funds” on the left navigation of the following page. Then, click into a fund’s prospectus to see its expense ratio; doing a search on the page for “expense ratio” is the easiest way to find it.

If you’d like to open an account with us and begin experiencing the HealthSavings difference, you can start the enrollment process here. Or, if you already have an HSA but would like to move it over to us, you can learn more about transferring HSAs here.

Author: James Denison


NOTE: Our office will be closed for Memorial Day on Monday, May 27. The NYSE will also be closed and trading will resume on Tuesday, May 28.