Forwardfinancialplanning Blog

2012–a year of disclosure January 17, 2012

New regulations coming into effect in 2012 will make this an interesting year in the financial markets.  New IRS requirements regarding cost basis information for mutual funds become effective in 2012.  In a nutshell, mutual funds must now provide cost basis information to the IRS on form 1099B when account holders sell “covered” shares.  ”Covered” shares are any mutual fund shares that an account holder purchases after January 1, 2012.   This requirement does not apply to the sale of mutual fund shares acquired prior to this effective date—these still fall under the “honor system” that has been the norm prior to these new regulations.  Tax preparers (and the IRS) have known for years that many tax filers didn’t always keep very good records to substantiate their cost basis, especially for funds held for long periods of time.  So, they’ve put the onus on the fund companies to track the information for their account holders, but to disclose it to both the account holder and the tax authorities.  Since trillions of dollars of previously acquired mutual fund shares don’t yet fall under the requirement, the new rules most likely won’t immediately yield additional revenue to the US Treasury.  More probably, there will be countless reporting snafus due to the variety of possible accounting methods that are eligible for use when tracking cost basis of mutual fund shares.

A second interesting 2012 disclosure requirement concerns 401k retirement plans.  Without getting too specific, employers will now be tasked to provide additional cost and expense information to their employees participating in such retirement plans.  The requirements dictate more direct and specific  disclosure of the numerous expenses that 401k plan participants absorb simply by joining the plan.  Industry insiders have long understood arcane expenses such as Sub-Transfer agency fees and other “revenue sharing” arrangements.  However, the average plan particpant has had no idea concerning these costs.  In fact,  numerous academic studies have found that many plan participants believe that they pay no expenses whatsoever, since they never actually “receive an invoice” for investment management fees, recordkeeping expenses, auditing fees and the like.  These new disclosures are to be made in actual dollars absorbed, which should be a real “eye-opener” for a lot of participants. 

Stand back and watch the fireworks…………………….