Presented by the Insurance Agents & Brokers Liability Practice Group

Rollover Verboten? Insurance Agents May Be at Risk for Recommending 401(k) Rollovers to Fund the Purchase of an Insurance Policy or Annuity

Edited by Timothy G. Ventura, Esq.

A 401(k) plan is a federally created and regulated account subject to the provisions of the Internal Revenue Code. Most 401(k) accounts are funded by stocks, bonds, mutual funds and other securities investments. Thus, individuals who sell and provide advice regarding these investments must be securities-licensed and are subject to the jurisdiction of the SEC and FINRA, the securities industry’s self-regulatory organization.

Insurance policies and fixed annuities are typically sold by insurance agents who are not securities-licensed (although some insurance agents are so licensed). The regulation of insurance companies, agents and products is controlled by the individual states. An insurance agent must be properly licensed in each state in which he or she transacts any business.

It has become increasingly common for insurance agents to recommend that a customer rollover some portion, or all, of a 401(k) account into an insurance policy or fixed annuity. Herein lies the danger to a non-securities-licensed insurance agent. The recommendation to purchase a life insurance policy or annuity is not problematic in and of itself, but the advice to withdraw cash from a securities product held within the 401(k) account, such as a mutual fund, may be considered a violation of federal and state securities laws.

While the SEC has the legal authority to initiate an action against any individual or entity that engages in improper securities transactions, in practice the SEC rarely brings such enforcement actions against insurance agents and defers to the states. FINRA has no jurisdiction over a non-securities licensed insurance agent, but it may bring an action against a broker-dealer firm that allows the execution of a faulty rollover transaction. The states in which an insurance agent transacts business do frequently initiate investigations and may bring enforcement actions against insurance agents engaged in such transactions.

So how does an insurance agent avoid potentially violating the securities and insurance laws in such situations? It seems most prudent to simply recommend the purchase of an insurance policy or annuity to a customer when such a product is appropriate for the customer, but to not make any recommendations as to how the purchase should be funded. Rather, the customer should be advised to consult with their financial advisor, if they have one, or their attorney, accountant, tax preparer or other trusted advisor.


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