Some insurance agents breaking law with 401(k) rollovers

Individuals without a securities license are increasingly, and unlawfully, soliciting business

May 30, 2019 @ 2:40 pm

By Greg Iacurci

Rolling money out of a 401(k) plan to fund an insurance product, like an annuity or life insurance policy, can be a difficult, tense decision for retirees. After all, seniors are earmarking a large chunk of their nest egg.

These rollovers are often initiated at the advice of an insurance agent. And with increased frequency, the agents making those recommendations are breaking the law.

"We've seen an increase in Vermont, and I think across the country as well," said Michael Pieciak, president of the North American Securities Administrators Association and commissioner of the Vermont Department of Financial Regulation.

(More: 401(k) dilemma: Advisers weather a fog of uncertainty surrounding IRA rollovers)

A recommendation to roll over money from a 401(k) plan involves two separate transactions: advice to take a distribution from the retirement plan and advice to park that money elsewhere.

Non-securities-licensed insurance agents — those who hold an insurance license but not a securities license — can recommend the second part of the equation without a problem. The first part is where these agents break state and federal law, according to regulators and attorneys. Agents may be able to legally recommend rolling from a cash or insurance position in a 401(k), but not from a securities product like a mutual fund, where the bulk of 401(k) assets are held.

The law applies not just to 401(k) rollovers but to all securities transactions — meaning recommendations to exchange variable annuities or variable universal life insurance policies may also be legally unsound.

While regulators, primarily at the state level, have been monitoring this activity and enforcing their rules, experts say those circumstances are rare and that culprits largely go unpunished.

"It's going on all the time," one prominent attorney who requested anonymity since his firm represents insurance clients said of rollover recommendations by non-securities-licensed agents. "There's been no regulatory presence — none, zero. A rule that's unenforced is, as a matter of speaking, not a rule at all."

(More: Rollover tip sheet: What advisers should consider)

Micah Hauptman, financial services counsel at the Consumer Federation of America, said this type of activity is often detrimental to investors, especially when retirees are advised to roll out of low-cost 401(k) investments into an expensive insurance product with a long lock-up period that's not in the customer's best interest.

Absent increased scrutiny, the situation is poised to get worse as baby boomers continue hurtling into retirement. In 2016, investors rolled $415 billion out of 401(k) plans, according to a report by the Limra Secure Retirement Institute. The group estimated that figure would swell to $466 billion by the end of 2019.

"This is where a lot of harmful activity and harmful recommendations occur," Mr. Hauptman said. "It's an unpoliced market."

Securities and Exchange Commission rules forbid non-securities-licensed individuals from engaging in securities transactions. That gives the SEC power to bring a civil enforcement case against non-securities-licensed insurance agents, perhaps in the form of a fine, disgorgement or cease-and-desist order, said Christopher Petito, attorney at Willkie Farr & Gallagher.

However, the SEC doesn't go after agents for such violations, or will only do so in extremely rare circumstances, experts said. An SEC spokesperson didn't return a request for comment.

The Financial Industry Regulatory Authority Inc. has limited authority in these circumstances. The group can go after the broker-dealer that executes a faulty rollover transaction, but not the non-securities-licensed individual who made the recommendation.

This leaves much of the enforcement up to the states. A handful have paid particular attention to this issue. For example, Iowa's insurance division issued a bulletin in 2011 laying out the licensing requirements for certain insurance and securities activities. The memo allows insurance-only individuals to discuss things like risk tolerance, financial objectives, liquidity needs and financial time horizon with investors, but expressly prohibits insurance-only individuals from "recommending the liquidation of specific securities, or identifying specific securities that could be used to fund an annuity or life insurance product."

Tennessee and Vermont subsequently issued similar guidance, in 2013 and 2018, respectively.

"It's [a problem] that regulators at the state level are working to expose and mitigate," Mr. Pieciak said.

Part of the problem, experts said, is the law's gray area. While states have tried outlining permissible and impermissible activities for insurance agents, the lines aren't always black and white, Mr. Pieciak said.

Insurance companies accepting rollover money also bear some of the responsibility.

Many insurers have processes to review the source of funds and suitability of the transaction for the investor, Mr. Pieciak said.

However, "you can only put so many processes in place as a company in terms of verifying information from a producer and providing that verification," he said.


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