That was going to be my next question: what kind of fund should the "cash" go into?

Money market funds would likely be appropriate (I believe Vanguard actually does this for you, rather than keeping cash lying around).

They do. Though note that VMMXX (Vanguard Prime Money Market) pays a bit more than VMFXX (Vanguard Federal Money Market.) VMFXX / Federal is their default settlement fund, so if you have large cash holdings it is still advantageous to put it into alternate funds.

Unrelated question: VMMXX has a higher yield (2.35% currently) compared to VMFXX (2.29%) but also has a higher expense ratio (0.16% vs 0.11%). Do these cancel each other out?

No, the yields are net of expenses so VMMXX is still slightly higher performing.