We recommend funding your Health Savings Account (HSA) to the maximum allowed and continuing to fund your HSA as long as you are allowed no matter how much money you have in the account so long as you have the required HSA-compatible health insurance.

Funding your HSA to the maximum has many advantages and few disadvantages. In 2020, the HSA contribution limit for a family plan is $7,100 plus additional $1,000 catch-up contributions per participant age 55 or older.

Most HSAs have a required minimum cash balance before you can invest the remaining funds. We recommend keeping your annual deductible in a cash account and invest the remainder of your HSA in an all-stock portfolio.

We have staff and clients using a few different Health Savings Account investment options. Personally, I use HSA Bank which offers an investment account through TD Ameritrade. I recommend using the latest Marotta’s Gone-Fishing Portfolio Calculator set to a 100% stock allocation for the asset allocation.

HealthSavings Administrators is another vendor we include in our list of firms offering HSA investment accounts.

Recently the University of Virginia (UVA) switched to using health savings accounts for their employee healthcare insurance. We analyzed the investment options available in the UVA health savings account and crafted an asset allocation recommendation for the investment side of an HSA.

For each fund choice, we used analysis from the Center for Fiduciary Studies to find what we believed were the best well-performing funds with low fees and expenses. Then from that list, we crafted an all-stock asset allocation in order to allow invested funds to grow at the maximum possible rate, hopefully to fulfill future care needs.

The novice impulse when crafting an asset allocation from 30 mutual funds is to put 1/30th of the portfolio in each fund. A better method of portfolio construction crafts an asset allocation along the efficient frontier. This is part art and part science. Developing an investment philosophy is what distinguishes different investment advisors.

Here is our asset allocation recommendation for a University of Virginia’s HSA all-stock portfolio:

30% (VFIAX) Vanguard 500 Index -expense ratio: 0.04%
16% (VIMAX) Vanguard Mid Cap Index -expense ratio: 0.05%
14% (VSMAX) Vanguard Small Cap Index -expense ratio: 0.05%
30% (VTIAX) Vanguard Total International Stock Index -expense ratio: 0.11%
10% (VEMAX) Vanguard Emerging Markets Stock Index -expense ratio: 0.14%

Average weighted expense ratio: 0.074%

Portfolio construction with limited choices is like an artist painting a canvas with limited colors. Some colors are never used. Other desired colors are not available and substitutes are selected. While this asset allocation uses just 5 of the 30 funds, it also does not use them equally.

All of the bonds were dropped because we wanted a long-term all-stock portfolio. All of the resource stock allocation was dropped because there were no resource stock options, such as energy, real estate, materials, or metals. All of the target date funds were dropped because retirement target date is irrelevant when considering health care costs.

Normally, the U.S. and foreign stock mix might include more foreign stocks than U.S. stocks, but there were no country specific investment options. The Vanguard Total International Stock Index fund is an all-world investment. As such, it will include many repressed countries that are low in economic freedom whose returns may suffer. For this reason, we shifted more towards the United States.

Once the allocation between U.S. and foreign stocks was set, sub allocations were crafted. Among U.S. stock choices there were Mid and Small Cap options. We decided to use Vanguard Mid Cap Index (VIMAX) and Vanguard Small Cap Index (VSMAX), both with an expense ratio of 0.05%, so we could more finely craft the blend of Mid and Small Cap.

These are very low cost funds. As a result, the portfolio’s average expense ratio is just 0.074%. We believe that this mix of funds should provide a timeless allocation for the HSAs of University of Virginia employees.

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