You have requested an opinion as to whether social security earnings may be invested
in mutual funds or investment vehicles other than U.S. Savings bonds. For the reasons
discussed below, it is our opinion that social security earnings can be invested in
mutual funds subject to a standard of prudence.
Statement of Facts
Sharon S~ is the representative payee for her two sons, Michael and Adam. Sharon filed
a representative payee report at the end of 1992, stating that she had saved $8,000
for each child. Some of the funds were invested in the mutual fund, Vanguard Windsor
II./
Applicable Law and Analysis
A representative payee is obligated to use funds for the "best interests of the beneficiary,"
20 C.F.R. § 404.2035(c). If there are funds left over after benefits are disbursed
in accordance with federal regulations, the remaining amounts are to be "conserved
or invested on behalf of the beneficiary" in accordance with rules followed by trustees,
20 C.F.R. § 404.2045(a). The regulations express a preference for investments in U.S.
Savings Bonds and deposits in interest or dividend paying accounts in a bank, trust
company, credit union, or savings and loan association insured under federal or state
law. 20 C.F.R. § 404.2045(b).
The POMS at GN 00603.001 and 030B.2 state that:
Benefits which are not needed for the immediate or reasonably foreseeable curmaintenance
needs of the beneficiary must be conserved or invested with minimum risk,except as
they may otherwise be properly used. All investments must be in a form which shows
that the payee holds the property in trust for the beneficiary. Preferred investments
are U.S. Savings Bonds. Benefits may also be invested in accordance with State law
governing the investment of trust estates by trustees.
POMS GN 00603.001 A. The POMS suggests referral to the Regional Attorney to ascertain whether investments
are proper under state law setting forth rules for trustee behavior. The POMS further
state that it will evaluate investments under a"prudent man" rule. Under that standard,
a prudent man would exercise a degree of judgment and care under the circumstances
then prevailing which persons of prudence, discretion, and intelligence exercise in
the management of their own affairs.
Minnesota law permits trustees to invest trust assets in "bonds, debentures, secured
or unsecured notes, preferred or common stocks of corporations, mutual funds, real
estate or real estate improvements or interests..." See Minn. Stat. Ann. § 501B.81. Subd. 5 (West 1990). A trustee can invest in every kind
of real and personal property or investment "that a prudent person would invest in
having in mind the preservation of the trust estate and the amount and regularity
of the income derived." Minn. Stat. Ann. § 501B.10 Subd. 1 (a) (1992). This "permission"
includes mutual funds. Id. The statute provides that:
In considering an investment, a trustee shall exercise the care, skill and judgment
under the circumstances then prevailing that a person of ordinary prudence would exercise
in the management of the person's own property and shall consider the role that the
investment plays within the trust's overall portfolio of assets.
Id. To determine whether an investment is prudent, a trustee should consider the safety
of the investment, the probable income, diversification of the portfolio, liquidity
of the investment as well as tax consequences. Minn. Stat. Ann. § 501B.10 Subd. 1
(b) (1992). See Matter of Trusts Created by Hormel, 504 N.W. 2d 505, 511 (Minn. App. 1993) (Standard for evaluating trustee's actions
is whether trustee prudently managed trust assets in light of settlor's intent and
beneficiary's interests); State Bank and Trust Co. of New Elm v. Melzark (In re: Trust of Kemske, 305 N.W. 2d 755, 761 (Minn. 1981). In an analogous situation, the powers and duties
of a guardian of a minor include exercising "due care" for conserved excess assets.
See Minn. Stat. Ann. § 525.619 (West 1995).
Investment in mutual funds is proper under Minnestoa Law as long as the investment
comports with the prudent investor rule. / The Restatement (Third) of Trusts § 227 comments h and m (1992), explain that investment in a suitable mutual fund
is generally proper under the prudent investor rule because it offers the trustee
a means of obtaining greater diversification at lower cost. Unduly conservative investments
fail to fully exploit the investment potential of the trust and that the trust becomes
eroded by inflation.
Whether a particular fund is prudent requires a case by case analysis. Our opinion
of the representative payee's investments is as follows:
The Vanguard Windsor II fund
Vanguard Windsor II is a growth and income fund which invests heavily in stocks which
are good companies at low valuations (called value investing). According to Lipper Analytical Services, the fund has $8.3 billion assets and lost 1.2% in 1994 (compared to a 1.6% drop
in the Standard and Poor 500 and a 4.14 loss in the average growth and income fund),
but gained 13.6% in 1993, 12% in 1992 and 28.7% in 1991. The fund gained 45.7% over
a five year period. The fund had 217% growth since June 30, 1985 compared with 183%
for the typical Growth and Income fund. The fund is relatively diversified. Morningstarreports that its portfolio is 14 % less volatile than the market as a whole.
The representative payee is under a continuing obligation to assess the risk and stability
of the investments she makes. Her portfolio indicates a reasoned approach to investing
her sons' funds and should be permitted.
I am returning the claims folder to you.
Donna M. W~
Chief Counsel, Region V
By:
Frances L. P~
Assistant Regional Counsel
FLP:dfEnclosure: (claims folder:
SSN: ~
Michigan law permits a trustee to invest in numerous holdings including common and
preferred stocks, notes, debentures, securities and bonds. See Mich. Comp. Laws Ann. § 555.201(1). A trustee is required to act as an "ordinarily
prudent person of intelligence and integrity who is a trustee of the money of others,
would purchase in the exercise of reasonable care, judgment and diligence, under the
conditions existing at the time of the purchase, having due regard for the management,
reputation, and stability of the issuer and the character of the particular securities."
Mich. Comp. Laws Ann. § 555.201(1). In Michigan, trustees do not have unlimited authority
to make investments with their own funds but must act as an ordinarily prudent man
who is dealing with another's property. See Mich. Comp. Laws Ann. § 555.201(1); § 700.813. See also In re Buhl's Estate, 211 Mich. 124, 173 N.W. 651, 654 (1920). A trustee always assumes the risk of a
searching scrutiny in a court of equity Id.
The Vanguard Windsor II fund
Vanguard Windsor II is a growth and income fund which invests heavily in stocks which
are good companies at low valuations (called value investing). According to Lipper
Analytical Services, the fund has $8.3 billion assets and lost 1.2% in 1994 (compared
to a 1.6% drop in the Standard and Poor 500 and a 4.14 loss in the average growth
and income fund), but gained 13.6% in 1993, 12% in 1992 and 28.7% in 1991. The fund
gained 45.7% over a five year period. The fund had 217% growth since June 30, 1985
compared with 183% for the typical Growth and Income fund. Tnhe fund is relatively
diversified Morningstar reports that its portfolio is 14 % less volatile than the
market as a whole.
1. AIM Weingarten
AIM Weingarten is a stock mutual fund which seeks long term capital growth. The fund
performed spectacularly in 1990 and 1991 outpacing most growth funds. The results
have been more disappointing since then. According to Lipper Analytical services, the fund had almost four billion in assets at the end of 1994. Its total return
foe the year was minus 0.3, but had a 54.7 % return over a five yea period. The load
is high at 5.5% of the sales price. Some forecasters (including Morningstar, an independent fund-data supplier) think the fund is undervalued and recommend it
for current purchase. In any event, it is a reputable fund and we should permit investment
in it subjecting the representative payee to the prudent trustee standard. The representative
payee should continue to monitor the fund's performance to determine whether this
is the most appropriate investment vehicle for her child.
2. Pasadena Growth Fund
Pasadena growth fund is a stock mutual growth fund. Like AIM Weingarten, Pasadena
Growth did well several years ago (68% return in 1991 according to Morningstar) but has performed poorly lately. The fund, which has a 5.5 load, lost 3.1% between
September 1993 and September 1994. Like AIM Weingarten, Pasadena Growth is a reputable
fund and we should permit investment in it subject to the representative payee monitoring
its performance to determine whether this is the most appropriate investment vehicle
for her child.
Applicable Law and Analysis
Social Security policy on investment of funds is set forth in POMS GN 00603.001 and 030B.2.
Benefits which are not needed for the immediate or reasonably foreseeable current
maintenance needs of the beneficiary must be conserved or invested with minimum risk,
except as they may otherwise be properly used. All investments must be in a form which
shows that the payee holds the property in trust for the beneficiary. Prefer red investments
are U.S. Savings Bonds. Benefits may also be invested in accordance with State law
governing the investment of trust estates by trustees.
POMS GN 00603.001 A. The POMS Manual suggests referral to the Regional Attorney to ascertain whether investments
are proper under state law setting forth rules for trustee behavior.
The POMs further sets forth it s popratring policy as the "prudent man" rule. Under
that standard, a prudent man would exercise a degree of judgment and care under the
circumstances then prevailing which persons of prudence, discretion, and intelligence
exercise in the management of their own affairs the standard case law on role of the
representative payee
Since Kenneth S~ died domiciled in Indiana, it is Indiana law that will determine
Mary S~ entitlement to social security benefits. See 42 U.S.C. 416 (h)(1)(A). Mary S~ claims that the Georgia decree is invalid and should
not be recognized because Kenneth failed to establish residency in Georgia
In Consumer Reports ranking of mutual funds in May 1993 AIM Weingarten ranked in the
middle range of growth funds. The 5.5 per cent load is high and the 5 year performance
averaged close to the Standard & Poor 500. See attached
Pasedena Group Mutual Fund
Pasedena Group Mutual Fund, AIM Weingarten Mutual Equity Fund, Perigo Co. stock, Paine
Webber Cash Fund and TINT TRSY interest bonds.