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VANGUARD VARIABLE INSURANCE FUND
BALANCED PORTFOLIO
PROSPECTUS SUPPLEMENT
FEBRUARY 2, 1996
The Board of Trustees of Vanguard Variable Insurance Fund - Balanced Portfolio
(the "Portfolio") has approved a revised investment advisory agreement with
Wellington Management Company ("WMC"), the Portfolio's investment adviser. The
new agreement involves a reduction in the annual rate of advisory fees to be
paid to WMC.
Under the terms of the new agreement, the Portfolio will pay WMC a basic
advisory fee at the end of each fiscal quarter, calculated by applying the
following annual percentage rates, to the Portfolio's average month-end net
assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL BASIC FEE RATE
---------- ---------------------
<S> <C>
First $500 million 0.100%
Next $500 million 0.050
Over $1 billion 0.040
</TABLE>
Both the current and revised agreements provide that the Basic Fee may
be increased or decreased by applying an incentive/penalty fee adjustment based
on the investment performance of the Portfolio relative to the investment
record of a "composite index" 65% of which shall be comprised of the Standard
and Poor's 500 Composite Stock Price Index and 35% of which shall be comprised
of the Lehman Long-Term Corporate AA or Better Bond Index. The fixed income
component of the composite index reflects a change from our customary standard,
the Salomon Brothers High-Grade Bond Index. In our view, the Lehman Index is
substantially similar to the Salomon High-Grade Index and accurately reflects
the long-term, high-quality fixed-income securities held in the Balanced
Portfolio.
The following table sets forth the incentive/penalty adjustment to the
basic advisory fee payable by the Portfolio to WMC under the new advisory
agreement:
<TABLE>
<CAPTION>
Cumulative 36-Month Performance Fee
Performance versus the Composite Index Adjustment
-------------------------------------- ----------
<S> <C>
Less than -6% -0.20 x Basic Fee*
Between -3% and -6% -0.10 x Basic Fee
Between -3% and 3% 0 x Basic Fee
Between 3% and 6% 0.10 x Basic Fee
More than 6% 0.20 x Basic Fee
</TABLE>
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* For purposes of this calculation, the Basic Fee is calculated by applying
the quarterly rate based on the Annual Basic Fee Rate using average assets over
the same 36-month period over which the performance is measured.
Under the rules of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending March
31, 1999, and until that date, will be calculated according to certain
transition rules. This revised investment advisory agreement replaces the
Portfolio's existing agreement with the adviser dated as of April 29, 1991, and
will go into effect on or about June 1, 1996. Until this date, the adviser has
agreed to waive its advisory fees to the extent necessary to abide by the new
fee schedule.
AFVV
