Vanguard boosts employee profit-sharing the most since the bull market of 1997

Vanguard Group, the giant  investment manager in Malvern, told employees who qualify for profit-sharing that their dividends will rise by 16.5 percent for 2017 when Vanguard gained $1 trillion in new customer assets and market gains.

That is the biggest change Vanguard has granted since the bull market year of 1997, writes Daniel Wiener, publisher of the  Independent Adviser for Vanguard Investors newsletter in Brooklyn, who has an investment practice recommending Vanguard funds for clients.

For qualifying employees, profit-sharing dividends will be calculated at $248.45 per point for the past year, up from $213.26 in 2016.

Since  Vanguard founder John Bogle started the plan in 1984,  points have appreciated faster than the S&P 500, Wiener noted. He calculates Vanguard has raised the value of its partnership points to 72 times the initial level, compared to a 33-fold increase for the S&P 500.

So have many of the other companies Vanguard compares itself to, such as Amazon and Google, said Vanguard spokesman John Woerth.

Woerth said the plan pays out based on the company's performance metrics over the past three years and enables employees "to share in the value that they create for our fund investors."

The payout is based on Vanguard's estimation of its funds investment performance compared to rival funds, its "client experience" as measured by the company, and its fees, which Woerth said averaged 0.11 percent of assets last year, down from 0.14 percent three years earlier.

Vanguard assets rose by nearly one-third, to $4.9 trillion from $3.4 trillion, during that period, boosting the company's revenue to around to $5.4 billion, from around $4.8 billion three years earlier, despite the lower fees.

Wiener notes the plan normally pays out more each year, but has fallen modestly a few times, including an 0.7 percent decline in 2015.

Bosses and senior employees can receive most of their yearly compensation from payments tied to the partnership through formulas that consider their years of service.

Bloomberg LP has estimated that top Vanguard officials, like chief executive Mortimer "Tim" Buckley, are paid in the tens of millions of dollars a year. Vanguard doesn't disclose executive pay but says it is competitive for the money management industry.

"It may not be hedge fund money, but for a low-cost indexing shop it ain't peanuts, either," Wiener says, noting that most Vanguard customers own "passive" investment funds based on the Standard & Poor's 500 and other securities indexes, which are relatively cheap to manage.

"The company is exceedingly profitable, and hence has the ability to pay its captains millions of dollars every year," Wiener concluded. "Indexing may have made some investors wealthy over the three decades the Partnership Plan has been around. But it is the successful marketing and running of index funds that really contributes to the bank accounts of Vanguard's executive team."

This week, Vanguard employees also learned that the S&P 500 index fund, one of the low-cost examples of passive investing that put the firm on the investing map, will be dropped this month from the mutual fund giant's menu of options for its employees' 401(k) plans. The choice of funds dropped from 28 to 16, if all the Target Date Retirement funds are counted as one option.

The company is also planning to build a new data center but has not said whether it will be at its Malvern headquarters or out of state.