"did the broker screw this up"

Maybe, maybe not; the broker had to follow the rules that were in place for Employer plan transfers at that time.

"For many years the financial planning and tax community was not sure if after-tax funds in a company plan could legally be rolled into a Roth IRA. In September 2014 an IRS ruling clarified this and the answer is a definitive "Yes." "

from: https://www.thebalance.com/can-i-roll-after-tax-401-k-funds-to-a-roth-ira-2388224

"IRS Notice 2014–54 handed us another tool for building assets in a Roth IRA. The ruling provides a path for rolling over any after-tax money in an employer-sponsored plan, such as 401(k)s and 403(b)s, to a Roth IRA. Employees with after-tax money in these plans can take a complete distribution and direct the plan administrator to send pre-tax dollars to a traditional IRA or another plan and then roll the after-tax contributions into a Roth IRA tax-free."

From: https://rodgers-associates.com/blog/how-to-legally-transfer-after-tax-money-into-a-tax-free-roth-ira...

"IRS doesn't know that the funds in the one Traditional IRA were sourced to after-tax money while it was in his 401k."

That's what form 8606 is used for.

"Non-deductible contributions to an IRA are reported on IRS Form 8606. This informs the IRS that certain funds in the IRA have already been taxed. This is the process used to track this information so the funds do not get taxed again when they are withdrawn. Non-deductible IRA contributions are not the only way after-tax funds end up in an IRA. They can also be rolled over from an employer plan. The IRS recently ruled after-tax money in an employer plan can be rolled directly into a Roth IRA. The taxable amount of a withdrawal from an IRA containing both after-tax and pre-tax funds is determined using the pro-rata rule. This pro-rata calculation is also done on Form 8606."

From: https://rodgers-associates.com/blog/how-to-avoid-being-double-taxed-on-your-after-tax-ira-contributi...

"when that Traditional IRA is converted to a Roth? He'll pay tax on after-tax money!?"

Only on Non-Basis. That means Not the Post-tax amount.

"Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account."

From: https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

Only the earnings, like this:

Pre-tax contribution <== taxed on conversion or distribution

Post-tax contribution <== not taxed on conversion or distribution

All Earnings <== taxed on conversion or distribution

And it's Pro-rata. You cannot declare the $25k is Post-tax, in your example. It's all in the same swimming pool. It's 25%, not $25k. Think about how Backdoor Roth works the same way. You don't qualify for Roth, so you put into a Traditional IRA your post-tax amount and immediately convert to Roth. If you have any other Trad IRA that was pre-tax or deferred, it all gets factored in for Pro-rata. Not just the one account, but across all that apply per the IRS formula.