You asked whether the investment of benefits by the representative payees in certain
mutual funds and life insurance is appropriate under Illinois law. Illinois state
law, which follows the "prudent investor" rule, indicates that a representative payee
must use reasonable care, skill and caution with the interest of the beneficiary as
the key element. We conclude that the mutual funds appear to meet that standard. However,
we cannot determine whether the life insurance policy meets that standard without
It appears Kirk B~ is the representative payee for the conserved funds of Elizabeth
and Benjamin B~. Sometime prior to June 2002, the payee invested an amount of money_11
in two separate Fidelity Blue Chip Growth funds.
It appears Susan G~ is the representative payee for the conserved funds of Matthew
P~. Sometime prior to September 2002, the payee invested $1,200 in American Funds:
The Income Fund of America.
It appears Kay M~ is the representative payee for the conserved funds of Blake P~.
Sometime prior to January 2003, the payee invested an amount of money_22 in Gerber
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, 416.645. 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 Illinois. See 760 ILCS 5/5; Memorandum from Reg. Chief Counsel, Chicago, to Deputy General Counsel,
Office of the General Counsel, Six State Survey, Investment of Conserved Funds, at
1 (August 2, 2001).
The regulations sate that the preferred investments for excess funds are United States
savings bonds and deposits in an interest or dividend paying account in a bank, trust
company, credit union, or savings and loan association which is insured under either
Federal or State law. 20 C.F.R. §§ 404.2045(b), 416.645(b). Similarly, operating procedures
require that excess benefits be conserved or invested with minimum risk, with preferred
investments being United States savings bonds. Benefits may also be invested in accordance
with state law governing the investment of trust estates by trustees. POMS GN 00603.001
The prudent investor rule is found at 760 Illinois Complied Statutes (ILCS) 5/5. 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.
760 ILCS 5/5(2). Illinois case law does not provide much guidance in this area. Rubin v. Laser, 703 N.E.2d 453 (Ill. App. 1998), discusses the purchase of bank stock in the trustee's
capacity as trustee and as an individual. Giagnorio v. Torkelson Trust, 686 N.E.2d 42 (Ill. App.2d 1997), discusses the sale price of a particular limited
interest stock held by the trust, but did not object to the trust buying and selling
In addition, a trustee in Illinois is required to consider the purposes, terms, distribution
requirements, and other circumstances of the trust. A trustee has the duty to use
reasonable care, skill and caution in the investment of funds. 760 ILCS 5/5(a)(1).
A trustee should diversify investments, unless it is in the best interests of the
beneficiary not to diversify. 760 ILCS 5/5(a)(3). Generally, a trustee in Illinois
has a duty not to delegate to others the performance of any acts involving the exercise
of judgment and discretion. 760 ILCS 5/5.1(a). However, a trustee may properly delegate
investment functions by exercising reasonable care, skill and caution in selecting
the investment agent, in establishing the scope and specific terms of any delegation,
and in periodically reviewing the agent's actions in order to monitor overall performance
and compliance. 760 ILCS 5/5.1(b)(1). This, presumably, would allow a trustee to
invest in managed funds, such as mutual funds. See also 760 ILCS 5/5.2.
Mr. B~'s investment in the Fidelity Blue Chip Growth Fund appears appropriate, so
long as the investment was selected with "reasonable care, skill and caution" and
the assets are reasonably diversified. See 760 ILCS 5/5(a)(1). The objective of the Fidelity Blue Chip Growth Fund is to seek
growth of capital over the long term and normally invests primarily in common stocks
of well-known and established companies. See http://fidelity.com (last visited Jan. 15, 2004). It normally invests at least eighty percent of assets
in blue chip companies whose stock is included in the Standard & Poor's 500 Index
or the Dow Jones Industrial Average, and companies with market capitalizations of
at least one billion dollars if not included in either index. See id. The fund has a Morningstar rating of four stars. See id. Regarding volatility, as of December 31, 2003, the fund had a beta of 1.04 and R2
of 0.97._33 See id. Finally, the fund has 190 total holdings. See id. In light of the foregoing, Mr. B~'s investment in the Fidelity Blue Chip Growth
Fund appears appropriate as long as he has exercised reasonable care, skill and caution
in selecting this fund and there is no conflict of interest on his part in selecting
Similarly, Ms. G~'s investment in American Funds: The Income Fund of America, Class
A shares, appears appropriate, so long as the investment was selected with "reasonable
care, skill and caution" and the assets are reasonably diversified. See 760 ILCS 5/5(a)(1). The fund objective seeks to provide a current income and, secondarily,
growth of capital through a flexible mix of equity and debt instructions. See http://americanfunds.com (last visited Jan. 16, 2004). It seeks investments in both the stock and bond markets
that provide an opportunity for above-average current income and long-term capital
growth. See id. The fund has typically provided income well in excess of that provided by stocks
in general. See id. The Income Fund of America, Class A shares, invests primarily in common or preferred
stocks, convertible securities, bonds, U.S. and non-U.S. government securities, cash
and equivalents. See id. The fund may invest only twenty percent of its assets in securities rated below
investment grade. See id. The fund has a Morningstar rating of five stars. See http://morningstar.com (last visited Jan. 15, 2004). According to Morningstar, this fund has a conservative
mix of stock and cash that has not slowed it, but has blunted volatility; overall,
it is "a bankable choice that should sit well with conservative investors." See id. In light of the foregoing, Ms. G~'s investment in the American Funds: The Income
Fund of America appears appropriate as long as she has exercised reasonable care,
skill and caution in selecting this fund and there is no conflict of interest on
her part in selecting it.
Ms. M~ indicated she invested a portion of Blake P~'s conserved funds in Gerber life
insurance. We are unable to determine if this may have merely been an intent to report
payments for premiums on a life insurance policy, or whether this was some other kind
of investment involving a life insurance company. If the representative payee was
merely paying premiums on a life insurance policy for the SSI beneficiary, it may
be more appropriate to evaluate the payments under POMS GN 00602.050. If this involves some other type of investment, we would be unable to determine
if this is an appropriate investment without additional information. Ms. M~ has appeared
to indicate that she invested conserved funds in a savings/checking account, U.S.
savings bonds, and certificates of deposit, as well as the insurance plan. If this
is correct, it seems that her investments, considered in their totality, are probably
sufficiently diversified. However, we do not have sufficient information to determine
whether this particular investment would qualify as an appropriate investment or whether
Ms. M~ considered both the reasonable production of income and safety of capital.
See 760 ILCS 5/5(a)(5). Without additional information, we are unable to determine if
Ms. M~'s investment would be appropriate under Illinois law.
Illinois has incorporated the Prudent Investor Act within its laws. Under Illinois
law, the investments made by Mr. B~ and Ms. G~ appear to meet this standard. Without
additional information, we are unable to determine if the investment made by Ms. M~
is appropriate. If the plan builds cash value and Ms. M~ has invested in other investment
vehicles, it appears the Gerber life insurance is an appropriate investment. If the
life insurance plan does not build cash value, it seems it is not appropriate.
_11Since Mr. B~ indicated he saved the conserved funds in a saving/checking account
and in mutual funds, it is not clear exactly what amount was placed in mutual funds.
_22Since Ms. M~ indicated she saved the conserved funds in a saving/checking account,
U.S. savings bonds, certificates of deposit and life insurance, it is not clear exactly
what amount was placed in life insurance.
_33Beta is a measure of a portfolio's sensitivity to market movements (as represented
by a benchmark index). The benchmark index, such as the S&P 500, has a beta of 1.0.
A beta of more (less) than 1.0 indicates that a fund's historical returns have fluctuated
more (less) than the benchmark index. Beta is a more reliable measure of volatility
when used in combination with a high R2. R2 is a measurement of how closely the portfolio's
performance correlates with the performance of a benchmark index, such as the S&P
500. R2 is a proportion which ranges between 0.00 and 1.00. An R2 of 1.00 indicates
perfect correlation to the benchmark index, that is, all of the portfolio's fluctuations
are explained by the performance fluctuations of the index, while an R2 of 0.00 indicates
no correlation. A high R2 indicates a high correlation between the movements in a
fund's returns and movements in a benchmark index. The lower the R2, the more the
fund's performance is affected by factors other than the market as measured by that
benchmark index. See http://fidelity.com (last visited Jan. 15, 2004).