The low-cost mutual fund provider Vanguard is immensely profitable.

The private, for-profit company earns millions of dollars in fees each year and pays income taxes. And for senior executives and others at Vanguard, there’s a closely watched compensation program called “Partnership Plan” paid out every year.

The Partnership Plan is Vanguard’s internal profit-sharing mechanism, designed to reward all employees, from top managers, who benefit the most, to full-time call-center employees, with a piece of the profits the low-cost fund manager generates.

This year, Vanguard pushed up the Partnership payout to April, instead of June, “to show our support for and thank our crew during these unusual times,” said Melissa Kennedy, a spokesperson. “Crew also received an additional, but smaller, reward in June in honor of Partnership Day.” .

“Consistent with prior years, we don’t discuss specifics of our compensation program, except to say that Partnership reinforces a collective crew interest in our clients’ long-term success,” she said.

Who gets Partnership dividends? That’s changed dramatically over time.

Previously, tenured employees got up to 30% of salary, a nice chunk of change that made up for lower salaries compared with other finance firms.

But in 2010 Vanguard restructured Partnership, and payouts were cut. In 2015, Vanguard Group reclassified around 2,100 U.S. staff of the Malvern-based investment giant’s global “crew” as hourly workers (not “exempt” salaried employees). The upshot was that those workers who were bonus-eligible would no longer get the extra money. Currently, Vanguard employs over 17,000 people worldwide.

The good news: The Partnership Plan dividend for 2019 grew 13.6% to a bit more than $322 per share, or partnership unit.

While the dividend keeps going up, its growth rate has slowed from the 16.5% boost two years ago, according to Independent Adviser for Vanguard Investors’ newsletter editor Dan Wiener.

“The Partnership Plan’s dividend is derived in part from the firm’s asset growth over the trailing three years. And it’s been a good three years for Vanguard, with assets up about 57%,” he said.

Vanguard manages $6.2 trillion in assets as of Jan. 31, 2020.

The Partnership Plan’s dividend has increased 51% over the same period.

Vanguard's partnership plan dividends, established by founder John Bogle in 1984, have grown faster than the S&P 500 index fund.
Adviser Investments
Vanguard's partnership plan dividends, established by founder John Bogle in 1984, have grown faster than the S&P 500 index fund.

Based in large measure on assets under management, rather than fund performance, the Partnership Plan pays out millions of dollars a year to Vanguard’s senior folks while limiting most employees to a bonus that is calculated using a tricky set of variables related to their job “grade” and tenure to determine the ultimate payout, Wiener said.

He estimates that Vanguard’s late founder John Bogle’s Partnership Plan payout for 2019 would have totaled about $32 million.

Bogle’s payout was based on disclosures about his total remuneration — of which 90% was reported to be from Partnership dividends — made several years ago when Bogle was still chairman.

“If Bogle were still there, he would have made $32 million. Infer what you like what the current chairman [Mortimer “Tim” Buckley] makes, but it’s likely in the neighborhood,” Wiener said.

Since 1984, the Partnership Plan’s dividend has grown 93.9 times its original $3.43 payout to $322.03 most recently.

By comparison, the value of one share of Vanguard 500 Index fund has, with all distributions reinvested, grown 41.3 times over the same period.

“Indexing may have made some investors wealthy over the three decades the Partnership Plan has been around. But it’s marketing those index funds, not investing in them, that really contributes to the executive teams’ bank accounts,” he said.

Tax time

The IRS reminds us that we must file Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return,” by Wednesday, July 15, to obtain an automatic extension to Oct. 15.

The extension provides additional time to file the tax return — it is not an extension to pay. If you pay now, that’s great; if you can’t, you’ll pay penalties.

The Pennsylvania Department of Revenue is posting updates on its COVID-19 Information page on www.revenue.pa.gov, according to Blue Bell CPA David Zalles.

Taxpayers and professionals can visit the online customer service center at https://revenue-pa.custhelp.com/ to electronically submit a question to a department representative. Or use the Schedule A Call service, which allows taxpayers and accountants to select a date and time to receive a call from a rep.

The call center can be reached at 1-888-728-2937.

Taxpayer assistance hours at the Revenue District Offices are from 8:30 a.m. Monday through Friday. Seniors have reserved hours from 8:30 to 10 a.m.

Personnel are working staggered shifts to tackle backlogs of incoming mail, such as paper checks and paper returns. Penalties and interest on 2019 PA-40s will be waived thru July 15. This applies to both tax balances and estimated payments.

The Department of Revenue also has issued guidance on temporary telework due to COVID-19 and has not changed its rules on sourcing of wages. Employers must withhold based on their physical location or place of business, not employees’ work location, according to Zalles.

The state’s use of private collection agencies has stopped. All in-person hearings before the board of appeals remain suspended, but Skype calls are available.