Investment Basics

When presented with investment proposals, keep in mind the adage: “If it sounds too good to be true, it probably is.” Relief association trustees should use caution when making investment decisions, especially during times of extreme market volatility.

Investment Authority

State law places restrictions on the types of investments that relief associations may invest in and sets limitations on exposure to higher-risk investments. We have received inquiries about investing in certain types of hedge funds, managed futures, and investments with short sales. Some of these types of investments are not authorized under state law.

Relief associations that meet at least one of four statutory conditions may invest under an expanded list of authorized investment securities. The four conditions are:

  • Having assets with a book value in excess of $1,000,000;
  • Using the services of an investment advisor for the investment of at least 60 percent of the relief association’s assets, calculated on market value;
  • Using the services of the State Board of Investment for the investment of at least 60 percent of the relief association’s assets, calculated on market value; or
  • Using a combination of the services of an investment advisor and the services of the State Board of Investment for the investment of at least 75 percent of the relief association’s assets, calculated on market value.[1]

Relief associations that do not meet any of the four conditions above are restricted to a limited list of authorized investment securities. Permissible investments for a limited list plan are identified and described in Minn. Stat. § 356A.06, subd. 6. Permissible investments for an expanded list plan are identified and described in Minn. Stat. § 356A.06, subd. 7.

Monitoring Investment Performance

Relief association trustees should understand their fund managers’ investment strategies and hold investment advisors accountable for the performance of the assets being managed. Relief association trustees are not relieved of their fiduciary duties by hiring professional consultants or investment advisors. Trustees, including municipal trustees who serve on a relief association’s board, should regularly compare the investment performance of their advisors with the performance of passively-managed index funds and other benchmarks.

The OSA provides two educational tools to help relief association trustees compare investment performance. One tool, an “Investment Report Card,” is sent by email to each relief association after our review of the relief association’s financial and investment reporting forms is complete. The report card provides one-year and multi-year rates of return calculated for the relief association, as well as a custom benchmark rate of return. The custom benchmark rate of return can be used to measure the relief association’s actual investment performance against market returns. benchmark may not fully reflect the different investment exposures or diversity of investments held within certain asset classes for some relief associations. 

Another tool is the annual “Financial and Investment Report of Volunteer Fire Relief Associations” that is published annually by the OSA. The report includes one-year and multi-year rates of return, calculated custom benchmarks, asset allocations, and market values for each relief association in Minnesota.

Diversification

Diversification can help reduce risk and smooth large swings in a portfolio’s rate of return. Diversification applies not only to investing in different asset classes, but also should include diversification within asset classes. Investors can diversify a portfolio, for example, by choosing stocks in different sectors of the economy. If an investor doesn’t feel comfortable picking individual investments for his or her portfolio, mutual funds and exchange-traded funds (ETF) can be purchased. Mutual funds and ETFs may hold a wide array of different stocks across a particular sector or contain a mix of asset classes. These funds may also contain a mix of asset classes and  are an option to help diversify a portfolio and help limit risk.

Investment Transfer Verifiers

Relief association trustees should make sure that transfer verifiers are on file with their financial institutions and, if applicable, the State Board of Investment (SBI). A verifier is an officer of the relief association whom the financial institution or SBI will contact to confirm the account number to which the money should be transferred when it receives a wire transfer request. Having a designated individual who will be the contact person to confirm transfer requests is a good internal control and helps to protect pension assets.

Additional topics in the Pension Investment Basics Series include:

Additional Resources

Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.

[1] The investment advisor must be registered with the Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940, or registered as an investment advisor in accordance with sections 80A.58, and 80A.60.  See Minn. Stat. § 356A.06, subd. 6.

Last Updated May 2024