"An unpoliced market." That's how one investor advocate described the practice of insurance agents who are not licensed to conduct securities transactions advising investors to roll over 401(k) funds into insurance products.
The rollover market for 401(k) funds is especially tempting right now because so many baby boomers are retiring. In many cases, they have hundreds of thousands — or even millions — of dollars, in their accounts, that they have saved over a lifetime.
Advising rollovers can be a tricky business, even for financial advisers. While in some cases, it might make sense to roll over 401(k) funds into an individual retirement account where other investments might be considered, in other cases it may not. The client's best interest should be made the highest priority.
That may not be happening when an insurance agent is giving the advice. As reporter Greg Iacurci recently pointed out, insurance agents who are advising clients to take funds invested in the stock market out of a 401(k) account to buy insurance products such as annuities are in violation of the law if they are not also licensed to conduct securities transactions.
But enforcement has been spotty at best. The insurance industry is largely regulated by states, and enforcement varies state-by-state. The Securities and Exchange Commission has jurisdiction over nonlicensed individuals conducting securities transactions, but it rarely goes after insurance agents in rollover cases.
The investing public, as well as advisers who are properly licensed, have a lot to lose if regulation is allowed to continue to be so haphazard. Investors dealing with unlicensed individuals could find themselves in overly expensive investments with long lock-up periods. And advisers could be losing out on a substantial stream of revenue that is being diverted to nonsecurities unlicensed insurance agents. Regulators need to step up enforcement, and both investors and the securities industry should put pressure on them to make sure they do their job.