Expense ratios are a big thing, but they aren't the only thing. Investor A, in your example, would pay a 0.12% higher expense ratio for the first year of their IRA. How much does that actually cost them? 0.12% * $5,500 = $6.60. Compounded over time, $6.60 per year per $5,500 invested can make a big difference, but a single $6.60 expense is insignificant when you recognize that the expenses will go down in the second year to be equal to the ETF.
Meanwhile, Investor B tries to spend $5,500 on VTI. VTI closed at $109.45 on Friday. Investor B would have been able to buy 50 shares at that price, with $27.50 left sitting in cash for the year.
I personally prefer the mutual funds most of the time because it's easier to invest exactly as much as you want to for a fair price without needing to worry about intra-day market movements, bid/ask spread, limit orders, etc.