SEC Ruling Helps Investors Make Decisions
The new guidelines require mutual funds to report both before- and after-tax performance, with after-tax performance stated at the maximum individual federal income rate of 39.6 percent, thus providing a worst case scenario. Funds will be required to display one-, five-, and 10-year after-tax returns in their prospectuses.
"Investors should have this information but do not now," said U.S. Rep. Paul E. Gillmor, (R-OH), the Congressman who originally introduced this legislation nearly two years ago. Gillmor noted that over the past 15 years, taxes have consumed more than 30 percent of the average stock fund's return.
Investors should take note that the reported after-tax performance may not be applicable to all investors, as the median income of mutual fund investors is only $55,000 per year, and the 39.6 percent tax rate doesn't become effective until taxable income exceeds $288,350.
The new disclosure requirement does not affect money market funds, nor does it affect tax-deferred investments such as 401(k) plans and variable annuities.