Vanguard threatens to ground pilots from making 401(k) trades

The Vanguard Group Inc. has threatened to block future 401(k) trades by a group of Southwest Airlines pilots who subscribe to an investment newsletter, concerned that their large trades are hurting other shareholders. Specifically, the fund provider is concerned about a group of fewer than 1,000 pilots in the Southwest Airlines Pilots Association's $2.6 billion retirement plan who subscribe to a monthly investment newsletter called The 401(k) Maximizer, according to a report in Reuters, which first reported the news. Last month's warning to The 401(k) Maximizer was the third such threat that Vanguard sent to the newsletter, according to Vanguard spokeswoman Linda Wolohan. Vanguard sent letters to the monthly publication in 2009 and 2012. In its warning, Vanguard is highlighting three of its funds: S&P 500 Index, Small-Cap Growth Index and Inflation Protected Securities Index. According to Reuters, investment activity by the pilots can generate as much as $45 million in trades within each fund after the newsletter adjusts its investment recommendations. The problem with en masse trading in a 401(k) plan is that fund managers aren't prepared to receive large end-of-day trades, which can hurt the fund's value and harm shareholders, according to Ms. Wolohan. “With 401(k)s, all transactions are aggregated at the end of the day, and we are obligated to sell at the previous day's net-asset value,” she said. “In that time, prices may have changed.” There are situations in which fund managers can prepare for massive transactions — say in the event a 401(k) plan substitutes a fund option in its menu — but the plan sponsor and the fund provider work in concert to ensure that such transactions go over smoothly. The latest round in Vanguard's tiff with The 401(k) Maximizer comes just after T. Rowe Price's decision to permanently ban 1,300 American Airlines employees in an attempt to put the kibosh on en-masse trading by a group that subscribes to EZTracker, an investment newsletter for airline workers. To some extent, John Nordin, 401(k) committee chairman at the Southwest Airlines Pilots Association, sympathizes with Vanguard. “The problem with this kind of scenario is that you have a group of people trading in the system and that brings about the possibility of terminating a good index fund that most people benefit from,” he said. Such large trades “are more of a problem with an index fund than with an actively-managed fund,” Mr. Nordin added. “I definitely have to stand up for Vanguard. They're judged on their tracking error and how closely they follow the index. When they're getting large amounts of buys or sells in a day, they don't even get that information until the day is over.” Southwest Airlines Co. spokeswoman Katie Coldwell referred media questions on the matter to the Southwest Airlines Pilots Association.