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401(k) Rollovers: A Legal Liability?

Did you know that, as a licensed insurance agent, you could be breaking the law by transferring funds from a 401(k) into a fixed or fixed-index annuity?

If the 401(k) was invested in securities, you could potentially be in hot water because the SEC prohibits unregistered individuals from giving investment advice. In practice, however, the SEC rarely pursues unregistered individuals. FINRA, with its focus on broker/dealers and their registered reps, has little time to oversee insurance-only agents. This type of enforcement tends to be left up to each individual state’s insurance department.

Several states have laid out specific regulations as to what advice can be provided by an insurance-only individual. Conversations around risk tolerance, goals, and general asset allocation are fine. But making recommendation to liquidate securities or which specific security to liquidate are considered investment advice and are illegal unless you are appropriately licensed.

The same rules apply to any other qualified plan rollover, annuity replacement, or brokerage account/mutual fund liquidation.

A Question of Risk Management 

What’s the probability of an enforcement action given today’s regulatory limitations? Minimal. On the other hand, what would be the magnitude of an enforcement action if brought forward? Devastating. You could face a fine, disgorgement of commissions, censure or possibly loss of your license.

It has been my experience, after 41 years of compliance experience, that your client today is not a problem. It will be those clients five or ten years from now whose memory of the transaction is a little fuzzy and their children, or more likely their attorney, helps them remember what you said or did not say.  

Develop and Maintain a Strong Paper Trail

Your best defense is a meticulous and secure paper trail. Things like follow-up letters, and contemporaneous notes can be a lifesaver. I once had a very successful attorney tell me that the messiest note written at the time of the transaction will trump the memories of the participants somewhere down the road.  So, document, document, document.

And don’t forget the value of good document storage.  Imagine, for example, you’re being sued by the client’s children. They allege you gave investment advice without a license and demand a remedy that includes Mom’s premium refunded, commissions disgorged, punitive fees, and a license suspension.

You proudly pull out a copy of your letter to the client from the time of the transaction. It states that you cannot give investment advice and acknowledges that the decision to liquidate the account was the client’s alone. After a pause, their attorney asks, “How do we know that letter was from three years ago and not created after you received our complaint?”  How do you respond?

The best answer would be, “I use __________ for permanent document storage. By design, ______________ will date and timestamp every document uploaded.  These documents are un-editable and cannot be modified or deleted for a period of seven years. As you can see, this letter was scanned and uploaded the same day as our transaction.” Case dismissed.

Bottom line? If you are not securities registered, beware of the probability and the magnitude of potential issues and take appropriate measures to protect yourself and your reputation.

Please contact one of our dedicated annuity representatives at (800) 699-0299 to learn more.


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