(Corrects fourth paragraph to say Vanguard imposes frequenttrading fees on some of its funds, not all of its funds, asimplied in the paragraph being corrected)
* Says mass trades based on newsletter recommendationsdisrupt fund managers
* Pilot subscribers can move up to $40 million per fund in aweek - plan sponsor
* Threat follows T. Rowe Price's trading ban on someAmerican Airlines pilots
NEW YORK, Oct 10 (Reuters) - Vanguard Group is throwing itsconsiderable heft into a battle between fund companies andinvestment newsletters.
The mutual fund company is threatening to prevent SouthwestAirlines pilots who subscribe to a monthly newslettercalled 401k Maximizer from purchasing the three Vanguard fundsin their union's retirement plan, according to officials atVanguard, the pilots union and the newsletter.
Fewer than 1,000 of the approximately 8,000 pilots in theSouthwest 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 weekafter the newsletter changes its investment model, said JohnNordin, a pilot who chairs the union's 401(k) committee.
Vanguard typically asks investors to give it at least aday's notice before making large trades and also imposes fees onfrequent traders in some funds. Maximizer officials say that, asa newsletter, they do not execute trades or know how many of theapproximately 1,000 subscribers at Southwest follow its advice.
Vanguard spokeswoman Linda Wolohan confirmed that the companytold Maximizer late last month to stop including its funds inits recommendations, and said it expects to soon contactindividual pilots who subscribe to the newsletter.
Scott Gibson, a Southwest pilot who is chief executive ofRetirement Maximizer, declined to comment on his plans. His firmcharges $85 a year for its Southwest newsletter. It avoided theissues in its most recent newsletter, which recommended no fundchanges in the SWAPA plan.
The 401(k) contains 17 other investment choices besidesVanguard's S&P 500 Index, Small-Cap Growth Index andInflation-Protected Securities Index funds.
"Large, unexpected transactions can be disruptive ...because they can affect the fund manager's ability to fullyinvest cash or to liquidate securities in a timely manner,"Wolohan wrote in an e-mail.
"If future recommendations by 401k Maximizer RegardingVanguard conventional (mutual fund) shares result in largetrades by SWAPA, we will reject additional purchases fromparticipants for a to-be-determined period of time," Wolohanwrote.
Vanguard's letter suggested that Maximizer recommendexchange-traded funds that are not disruptive to portfoliomanagers because they are priced throughout the day. Retirementplan fund orders are bundled for execution at a single priceafter the market closes.
Vanguard's threatened restrictions follow a permanenttrading ban T. Rowe Price Group imposed in August onsome American Airlines pilots it said were activelytrading its four funds in their 401(k) plan based on signalsfrom EZTracker, another monthly newsletter for airlineemployees.
(Reporting By Jed Horowitz; editing by Linda Stern, GunnaDickson and Steve Orlofsky)
- Mutual Funds
- Vanguard Group
- American Airlines
- Southwest Airlines