Funds Must Show After-Tax Returns: SEC

However, after-tax results will not have to be included in materials given to investors in tax-deferred accounts, such as 401(k)s and IRAs.

Stock and bond funds will have to include after-tax results for the past one-, five- and 10-year periods in the fund’s prospectus. Money market funds aren’t affected.

Standard Bearing

After-tax results must be shown in a standardized table, which will allow investors to compare returns of different funds. Those returns will be based on the highest federal income tax rate (currently 39.5%), in order to provide investors with the “worst-case scenario.”

Shorter fund “profiles” and fund advertisements that refer to performance must include after-tax results in addition to pretax figures, the SEC added.

Tax Disadvantaged

While the impact of taxes vary, the SEC estimates that taxes reduce stock fund returns about 2.5%, on average.  In fact, the report suggests that between 1994 and 1999, investors in diversified US stock funds lost an average of 15% of their annual gains to taxes.

The SEC will require funds to show after-tax results both for “pre-liquidation” and post-liquidation results. “Pre-liquidation” reflect any taxable distributions by the fund, while post-liquidation results will reflect distributions, as well as any taxable gain or loss to the holder as a result of selling the fund shares.

After-tax returns are not required in advertisements or sales literature – but if the fund company decides to present them, they must be calculated in accordance with the standardized formulas.

– Nevin Adams         editors@plansponsor.com

The new rules are at: http://www.sec.gov/rules/final/33-7941.htm