No. of Recommendations: 3
1) How does this benefit anyone but Vanguard?

Actually...Vanguard itself really does not benefit from this arrangement. These fees are simply a way for Vanguard to make everyone pay the fees they are actually responsible for. Look at it this way...

Person A has $5000 at Vanguard in VFINX; Person B has $50,000 at Vanguard in VFINX. Using just the expense ratio of 0.18%, person A would pay fees of $9 and person B would pay fees of $90. Unfortunately for Vanguard, there was a total cost of running VFINX for these two people of $109 (just accept the premise). Now...which person do you believe should be responsible for paying that $10 fee? In terms of work required by Vanguard, do you think peson B took up 10 times the resources? I don't...and neither does Vanguard. So the fee passes to the person that has essentially underpaid.

Now...let's change the operating cost for Vanguard and say it only cost them $100 to run the fund for these two people...but person A still pays the $10 fee and they take in $9 extra. Vanguard makes out great, right? I mean, they pocket $9 for nothing. Well...no. That $9 would actually be placed back into VFINX increasing the NAV of the fund.

Vanguard does not strive to make a profit on the operation of the mutual funds...so any fees and expenses received from shareholders above the operating expenses (including management fees, trading costs, etc.) is returned to the mutual funds. It really is a great system for the investors...especially the big guys, but it is even good for the little guys if you look at the total fees paid over a 10-year period of relatively focussed investing (only 2-3 funds).

Hope that clears some of their thinking up a bit.

ACME
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