Vanguard May Curb 401(k) Trading by Southwest Pilots

Friday, 11 Oct 2013 12:27 PM

 

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Vanguard Group is throwing its considerable heft into a battle between fund companies and investment newsletters.

The mutual fund company is threatening to prevent Southwest Airlines pilots who subscribe to a monthly newsletter called 401k Maximizer from purchasing the three Vanguard funds in their union's retirement plan, according to officials at Vanguard, the pilots union and the newsletter.

Fewer than 1,000 of the approximately 8,000 pilots in the Southwest Airlines Pilots' Association $2.6 billion 401(k) retirement plan subscribe to Maximizer, but they can generate $30 million to $45 million of trades in each fund in the week after the newsletter changes its investment model, said John Nordin, a pilot who chairs the union's 401(k) committee.

Vanguard typically asks investors to give it at least a day's notice before making large trades and also imposes fees on frequent traders in some funds. Maximizer officials say that, as a newsletter, they do not execute trades or know how many of the approximately 1,000 subscribers at Southwest follow its advice.

Vanguard spokeswoman Linda Wolohan confirmed that the company told Maximizer late last month to stop including its funds in its recommendations, and said it expects to soon contact individual pilots who subscribe to the newsletter.

Scott Gibson, a Southwest pilot who is chief executive of Retirement Maximizer, declined to comment on his plans. His firm charges $85 a year for its Southwest newsletter. It avoided the issues in its most recent newsletter, which recommended no fund changes in the SWAPA plan.

The 401(k) contains 17 other investment choices besides Vanguard's S&P 500 Index, Small-Cap Growth Index and Inflation-Protected Securities Index funds.

"Large, unexpected transactions can be disruptive ... because they can affect the fund manager's ability to fully invest cash or to liquidate securities in a timely manner," Wolohan wrote in an e-mail.

"If future recommendations by 401k Maximizer Regarding Vanguard conventional (mutual fund) shares result in large trades by SWAPA, we will reject additional purchases from participants for a to-be-determined period of time," Wolohan wrote.

Vanguard's letter suggested that Maximizer recommend exchange-traded funds that are not disruptive to portfolio managers because they are priced throughout the day. Retirement plan fund orders are bundled for execution at a single price after the market closes.

Vanguard's threatened restrictions follow a permanent trading ban T. Rowe Price Group imposed in August on some American Airlines pilots it said were actively trading its four funds in their 401(k) plan based on signals from EZTracker, another monthly newsletter for airline employees.

© 2014 Thomson/Reuters. All rights reserved.

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