1. If you're exchanging between Vanguard funds, the "Exchange (Sell to Buy)" option is exactly what you need to use. Since your current fund is a Fidelity fund and based on the screen shot, I think you'll have to do it in two steps: First, sell the Fidelity fund by clicking on the "Sell" button. Second, buy the Vanguard fund by clicking on the "Buy" button. You might need to wait a day or two for the sell to go through before making the buy, but I'm not sure about that.
2. A settlement fund is just a temporary parking spot for cash inside your IRA. When you sell stuff (like the Fidelity fund), the cash proceeds go into your settlement fund. When you buy stuff (like the Vanguard fund), the money to pay for it comes from your settlement fund. If you contribute additional money to your IRA, it goes into your settlement fund first, and then you can use it to buy stuff.
While the money is in that parking spot, Vanguard actually invests it for you in a cash-like mutual fund so you do get a bit of interest on the cash while it is sitting there.
You don't need to do anything with it except know what it is. (Well, I think Vanguard has two or three different options for settlement funds, so you could look at the other ones and see if you like one of them better, but they're all good.)