Ricki P~ is the representative payee for the conserved funds of Jeffrey M. P~, Katelyn
M. P~, and Kelli M. P~. Mr. P~ has asked about investing the assets of these children
in three index funds of the Aid Association For Lutherans (AAL) Mutual Funds: the
AAL Small Cap Index Fund II; the AAL Mid Cap Index Fund II; and the Large Company
Index Fund II. The notes in the file suggest that Mr. P~ believes that such investments
would be preferable to insured accounts that limit him to checking or passbook savings
on a monthly basis that result in his purchasing a lot of certificates of deposit
worth $200.00 each. He has supplied a prospective of these AAL Mutual Funds. The file
indicates that he has apparently also considered investment in "blue chip stocks"
and the placing of short-term money in a money market fund.
Federal regulations provide that, after a representative payee has used Social Security
benefit payments for the current maintenance of the beneficiary, any remaining amounts
are to be conserved or invested on the beneficiary's behalf. See 20 C.F.R. § 404.2045.
Any such "[c]onserved funds should be invested in accordance with the rules followed
by trustees." Id. We look to state law to determine how trustees should invest funds.
See POMS GN 00603.040(A). Generally, states tend to follow a "prudent investor" rule, and that rule is
applied in Minnesota. See M.S.A. § 501B.151(8)(d); Six State Survey, Investment of
Conserved Funds, 2001-08 SSA 01-P-06 (Gumm, Region V).
The prudent investor rule is found at Minnesota Statutes Annotated (M.S.A.) § 501B.151.
No specific types of investments are required or restricted. No specific investment
or course of action is, taken alone, prudent or imprudent. The trustee may invest
in every kind of property and type of investment, subject to the prudent investor
rule. M.S.A. § 501B.151(8)(d). Minnesota case law does not provide much guidance in
this area. In re Gerschcow's Will, 261 N.W.2d 335 (Minn. 1977), suggests that certificates
of deposit are not per se invalid trust investments.
In Trusteeship of James T. W~, N.W.2d §§, 2001 WL 800003 (Minn. App. July 9, 2001),
the Minnesota Court of Appeals, in an unpublished case, discussed the responsibility
of the trustees to diversify holdings.
In addition, a trustee in Minnesota has a duty to use reasonable care, skill and caution
in the investment of trust funds. A trustee should diversify investments, unless it
is in the best interest of the beneficiary not to diversify. M.S.A. § 501B.151(3).
A trustee may delegate investment decisions, provided that the trustee used reasonable
care, skill, and caution in selecting the agent. M.S.A. § 501B.152(a). Thus, it would
be appropriate to invest in a managed fund, such as a mutual fund, if otherwise reasonable.
The investment in any of the kinds of vehicles proposed by Mr. P~ appears appropriate,
so long as the investments are selected with "reasonable care, skill, and caution,"
and the assets are reasonably diversified. M.S.A. § 501B.152(a). The use of mutual
funds appears reasonable, and, since Mr. P~ has suggested the use of three index funds,
which are themselves diversified to a degree, such investment seems appropriate, so
long as the funds are chosen with reasonable care. There is nothing in the record
to indicate that the AAL Mutual Funds suggested do not meet this standard. So long
as Mr. P~ has exercised reasonable care, skill, and caution in selecting these funds,
and there is no conflict of interest on his part in selecting them, use of these investment
vehicles appears appropriate. Similarly, if he exercised such care in the absence
of a conflict of interest in selecting blue chip stocks or money market funds, such
choices would also be appropriate.
Minnesota has incorporated the Prudent Investor Act within its laws. Under Minnesota
law, the types of investments Mr. P~ has proposed appear to meet this stand. So long
as the particular funds are reputable, the investments should be considered reputable.
You can assume that the funds for which he has submitted a prospectus are reasonably