Originally published: June 27th, 2017
As loyal readers know, Mrs. Wizard and I recently moved to Denver Colorado. That’s been a pretty big change. Probably the biggest aspect of that change is our new employment situations. Technically I was able to transfer within the company I was working for, but it’s still a pretty new job for me since my previous employer was acquired by the new one in an asset sale in December of 2016. I transferred 2 months later.
I never really talked about our health insurance situation on this site before because there wasn’t much to talk about. My previous employer had a very good plan with Kaiser Permanente, and Mrs. Wizard’s employer’s plan was pretty crappy. So we were both on my insurance and that was that. We’re young, pretty healthy, and don’t do a lot of risky shit (like skiing or whatever) so we don’t really have much in the way of medical expenses. When something would occasionally come up, it was really cheap to deal with because, as I mentioned, the plan was really good.
So there wasn’t really anything in our budget or financial considerations about health care costs. The premium was deducted out of my salary, and we just didn’t think too much about it.
That was nice.
Well since we both changed jobs our health care situation has changed…sort of. Mrs. Wizards new employer here in Denver also has a pretty crappy plan, so we’re still on my insurance. But my insurance plan is not nearly as good as the old one, albeit less crappy than Mrs. Wizard’s.
And no Kaiser.
That meant we had to choose between a Qualified High Deductible Health Plan (QHDHP) with a Health Savings Account (HSA) or a Preferred Provider Organization (PPO). Life is so much more complicated without Kaiser…
We went with QHDHP + HSA because it seemed like the better deal for folks that don’t expect to have a lot of medical expenses.
While it has a higher deductible and a higher out of pocket maximum, the QHDHP has the benefit of lower premiums and an HSA. Until we’re a lot older, we don’t expect very much in the way of medical expenses, so we’re unlikely to exceed the deductible anyway unless we had some catastrophe like a car accident or an unexpected diagnosis.
So for now, it makes more sense to me to pay lower premiums and pocket the difference in the HSA pre-tax. Plus the HSA is with Optum Bank, which allows me to invest a portion of the account value. You can probably imagine that I’m pretty into that idea.
I didn’t contribute to the HSA for the first quarter of the year for cash flow reasons associated with moving.
Moving is expensive!
Ultimately we’ve drastically lowered our cost of living by getting out of California, but in the near-term we needed a lot of cash to make it happen.
Which is all to say that now things are settled down a bit, it’s time to start putting money in the HSA. We’re going to maximize our contribution for 2017.
I’ve adjusted the portfolio page to include the new HSA (account #3), so this will be tracked along with the rest of our “wet worth”.
There are three different account types available to choose from, and the differences are related to how you plan to use the investment feature of the account. Conveniently they provided me with a Vogue magazine style quiz to figure out which account was the perfect match for me:
Much to my disappointment, my answers didn’t score enough points for them to recommend the “Health eInvestor” Account option.
Like I’m way into investing…I should get an “eInvestor” account right?
Wait a minute…that is a super convoluted fee structure. This isn’t going to be easy…
Rather than just blindly trusting the results of the quiz, I went into my own deep dive. Here’s what I came up with.
First a summary of the options:
The “eAccess” account charges a $3/month “investment fee” if you want to invest some of your HSA funds. You have to keep $2,000 in cash in the account in order to be able to make those investments. The account pays ZERO interest. If the account balance is less than $500, they charge a $1/month maintenance fee, but your employer pays it.
The “eSaver” account does not charge a monthly “investment fee” if you want to invest some of your HSA funds. You still need to keep $2,000 in cash in the account in order to be allowed to invest the excess. But the account pays you interest. It’s a sliding scale depending on how much you have as cash: 0.05% APY for balances less than $2,000. 0.1% for balances between $2,000 and $5,000. 0.2% for $5,000 – $15,000 and a whopping 0.4% for balances over $15,000. The catch is that the maintenance fee jumps up to $3/month for balances less than $5,000, although your employer pays $1 of that.
The eInvestor account does charge a monthly “investment fee” but it’s $2.50/month. The minimum cash requirement for investing is $500, which is much lower than the other two account types. This account also pays you interest on the cash balance according to a sliding scale, but it’s a different (lower) scale: 0.05% APY for balances less than $2,000 and 0.10% for balances over $2,000. This account also charges the higher $3/month maintenance fee on balances less than $5,000 (your employer still picks up $1 of that).
Second a few initial reactions:
Jesus tap dancing Christ this is complicated. Why is this so complicated?
No monthly investment fee sounds good. Maybe I’m glad my quiz told me to sign up for the eSaver account…
I want to be able to invest this money rather than have it sit around as cash. The eAccess acount is definitely not the right one…
But the trade-off is interesting between the eSaver and eInvestor. Hmmmm…
Third a comparison and discussion of the eSaver and eInvestor account differences:
I hate fees. I firmly believe that the single most important thing you can do to increase your success as an investor is to reduce your fees, which made the eSaver account a very appealing choice.
With the eSaver account, you could actually have zero fees if you just maintain a cash balance over $5,000.
But then you have $5,000 in cash sitting around making 0.2% which is pretty awful.
The whole premise of this exercise is based on the idea that we don’t expect to have a lot of medical costs right now. There’s no sense keeping that much of the account as cash.
But how much cash should we keep?
On the quiz I said my approach to future medical savings was “I plan to save most of what I contribute, but may make withdrawals occasionally”. That gave me 3 points and was one of the big reasons I didn’t score enough to get to eInvestor level.
But the difference in the amount of cash you have to keep in the account is a $1,500 swing. That’s kind of a lot of cash…Is it too much? I don’t know.
I think having $500 readily available is a pretty decent amount for us to keep as cash. This should cover a couple unexpected doctor’s visits, one-time prescriptions and miscellaneous over the counter purchases.
But wait a minute. HOLD THE PHONE!
If we want $500 available to spend, we’ll need to keep $500 OVER the minimum amount needed to qualify for investing. If we maintain just the minimum cash balance, we won’t really have that available assuming we intend to stay invested.
Let’s say we’re enrolled in the eSaver account and we have the bare minimum $2,000 in cash and the $2,000 is invested in mutual funds. Then one day we need $200 for a doctor’s visit and a prescription for antibiotics. We want to pay for it out of the HSA. Well we’ll have to liquidate $200 worth of mutual funds because if we use the cash we’ll dip down to $1,800 which is too low to have investments.
So… the minimum amounts are…meaningless distinctions really. They’re there to distract you.
So how do we think about this? In investing, fees are typically expressed as an expense ratio which is a percentage of the total account value. These are being expressed as dollars/month…again I think to distract you. Initially I thought about the fees as a percentage of the amount you can invest:
The fees are $24/year ($3-$1=$2/month maintenance fee) and $54/year (same maintenance fee plus $2.50/month investing fee) for the eSaver and eInvestor respectively. I’m assuming that I won’t keep $5,000 in cash in either case.
So let’s say I have $7,000 in the eSaver, $4,500 of which is invested. $2,500 is in cash, $500 of which I want to have available to use. I’m paying an effective expense ratio of 0.53% on the amount invested (24/4500).
If I had an eInvestor account I could still have my $500 cash available to use, but have $6,000 invested. But that works out to a 0.9% expense ratio on the amount invested (54/6000).
That is not a better deal!
Granted the actual percentage will change with the account value since the fee is fixed, but the two will scale together. Making the denominator $1,500 bigger is not a big enough shift to offset that much in fees. When viewed this way, the difference between the minimums would have to be more like $6,000 for the expense ratios to equal out.
At this point in the evaluation process, I felt pretty smart. The eInvestor account is meant to appeal to people like me that want to be aggressive with their HSA, but I’m savvy enough to realize that they’re fleecing us with fees.
But wait. Am I looking at it right?
That $2,000 in minimum cash is dead weight from an investment perspective. It only makes 0.10% in the eSaver account. And as long as you plan to have some amount invested, the specific minimum is meaningless in terms of how much cash you have “available” to spend on medical costs.
So really we need to look at the difference in the fees as a function of the difference in the amount you can invest.
So $54 – $24 = $30 difference in fees divided by the $1,500 difference in the amount you can have invested is 2%.
That’s pretty expensive.
But in terms of total returns, if you can get more than 2% out of that $1,500, you’ll be money ahead compared to if it’s locked up as cash.
That’s not asking a lot.
So Optum isn’t fleecing the folks that want to be aggressive and invest most of their HSA. They’re fleecing the people who want to invest *some* of their HSA by presenting what appears to be a middle-of-the-road, lower risk option that charges less in fees. Actually they’re probably fleecing most everybody, because the quiz is designed to guide you to the middle option.
Most people are not going to score an 11 or 12 on that quiz. There are only three questions, so you have to answer with a 4 on at least two of them if you’re going to score that high.
I’ll bet most of the folks that are interested in investing are probably maxing out their contribution, or at least putting in a healthy chunk of change. So maybe a lot of folks score a 4 on the first question.
But re-read the “4” answer on question 2:
“I plan to maximize the tax deferred savings and will pay current medical expenses out of pocket.”
Who’s going to check that? Especially when “I plan to save most of what I contribute, but may make withdrawals occasionally” is an option. Why would you pay for a minor medical expense out of pocket if you can get a 25% (or whatever your tax rate is) discount by using HSA funds? Most people who are financially savvy are probably not going to check the 4 point answer, because even if you are serious about investing most of your HSA savings, it’s kind of a dumb answer.
Same for question #3. The 4 point answer reads “I want to keep as little in the savings portion as possible and invest the rest.” When you really think about it, that sounds like the same thing as question #2 just worded differently right? Invest to the max and probably have to pay out of pocket since you have “as little in the savings portion as possible”.
I have to say that I was very surprised by all this. Once upon a time, financial services companies used to hawk really high fee products and everyone just bought them because they were rubes who didn’t understand the impact fees had on investment performance.
Now that the gospel of low fee index investing has spread further and wider, they have to resort to this serbian jew double bluff trickery to steer you towards what you think is a financially savvy, low fee, middle-of-the-road choice.
But it plays right into their hands. They know they can make way more than a 2% return on that extra $1,500 that the eSavers will be keeping as cash deposits, which is why they’re willing to trade the piddly fees.
Well no deal optum bank! We’re going full eInvestor, even if that’s not what the quiz says.