Biggest Donor-Advised Funds Are Slower to Distribute Assets, Study Finds
Nearly 80 percent of donor-advised fund accounts are distributing money to charities rapidly enough to deplete the initial contributions to those accounts within 15 years, according to a new study.
However, the study found that funds with the biggest assets are distributing money at slower rates — so the overall picture is not as healthy as that 80 percent figure suggests.
The study by the Donor Advised Fund Research Collaborative was funded by the Bill & Melinda Gates Foundation.
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Nearly 80 percent of donor-advised fund accounts are distributing money to charities rapidly enough to deplete the initial contributions to those accounts within 15 years, according to a new study of a limited number of account sponsors.
However, the study found that funds with the biggest assets are distributing money at slower rates — so the overall picture for payout is not as robust as that 80 percent figure suggests.
The study by the Donor Advised Fund Research Collaborative was funded by the Bill & Melinda Gates Foundation. The collaborative is building a database to provide information about how donor-advised funds are being used.
More About Donor-Advised Funds
DAFs allow donors to contribute cash, stocks, and other assets into accounts and take an immediate tax deduction. The donors can then decide which working charities will get the money and when, sometimes many years later.
Because the funds hold so many assets, they have become an important fundraising source — and the topic of much discussion on Capitol Hill and in other policy circles because they don’t face rules on distribution, which foundations do.
Even so, in 2020, the latest year for which information is available, grants to charities from the 10 largest DAFs totaled $22.41 billion. That’s roughly double the amount the 10 biggest foundations gave that same year.
Scholars said the new study can help policy makers figure out the landscape and what rules might be needed for donor-advised funds and can help fundraisers make better decisions about how to seek grants from them.
The study found that 52 percent of accounts have four-year average annual payout rates of 5 percent to 49 percent; 35 percent distribute less than 5 percent, and 13 percent of accounts award 50 percent or more.
The study is likely to provide ammunition to both sides of the debate over whether tighter regulation of donor-advised funds is needed, including rules that would require minimum annual payouts.
One key bill in Congress would allow donors to get an upfront tax deduction for donor-advised-fund deposits only if they distribute the money to operating charities within 15 years.
For community foundations and certain other organizations, like Jewish federations, the bill would exempt donor-advised fund accounts of $1 million or less from any payout requirements; larger accounts would have to distribute at least 5 percent annually.
Supporters of the legislation say that too much money sits idle in donor-advised-fund accounts for too long, generating fees for those that manage them but doing nothing for charity.
Opponents say legislation isn’t needed because the payout rates for donor-advised funds are robust, and they say tighter rules would discourage giving through DAFs. Jeff Hamond, who leads the Community Foundation Public Awareness Initiative, an advocacy group that represents about 150 U.S. community foundations nationwide, said the study shows that donor-advised funds are “a flexible philanthropic tool that’s used by lots of different people in lots of different ways. There isn’t some widespread abuse that requires rewriting the rules for all donor-advised funds of all sizes.”
The study has some significant limitations. It did not look at donor-advised fund accounts held at organizations with commercial affiliates, like Fidelity Charitable and Vanguard Charitable, which are among the largest sponsors of such accounts. Instead, the researchers examined the activity of 13,000 accounts at 16 community foundations and five religiously affiliated organizations..
Also, accounts with more than $100 million in assets were excluded to protect donor privacy (there are relatively few accounts above that level), and the research suggests that the largest accounts tend to have the lowest payout rates.
Danielle Vance-McMullen, assistant professor in the School of Public Service at DePaul University, and Daniel Heist, assistant professor at the George W. Romney Institute for Public Service and Ethics at Brigham Young University, conducted the study. Both have fundraising experience.
Heist said that they are planning to do subsequent research involving donor-advised fund accounts held at organizations with commercial affiliates. He noted that “the client relationship is different” at those organizations, making it more difficult to get data even if it is anonymized.
Another shortcoming: The study does not exclude transfers from one donor-advised fund to another; those are counted as “payout,” just like a grant to an operating charity. Vance-McMullen says future research will exclude those transfers. She said such transfers likely had little impact on findings like the median sum distributed, although she acknowledged they could affect some statistics, such as total grant making from large organizations.
Despite the limitations, Heist and Vance-McMullen said the data in the new study holds important insights for fundraisers. Heist said the research underscores the importance to fundraisers of knowing which of their clients with donor-advised fund accounts give money to charity every year and which make large grants infrequently, because different donors require different approaches. For some the largest donors who give less frequently, fundraisers may want to focus on bequests, Heist said.
Another insight from the research: Although the flow of money going into donor-advised fund accounts tends to spike at the end of the year, as it does with most kinds of charitable activity, likely due in large part to donors seeking tax deductions, the grant making from donor-advised funds tends to flow more evenly throughout the year.
The takeaway, says Heist: “If I’m a major-gift officer, I don’t need to wait for year end” to step up outreach to donor-advised fund account holders.
Heist noted that some of the largest donor-advised fund accounts studied were formally structured as “endowed” accounts, and some others informally behave like endowed accounts. Such accounts are similar to endowments at universities and foundations, with rules designed to allow regular grant-making at rates intended to maintain or increase the principal, says Heist. Under such arrangements, the assets in such accounts are often granted to the sponsor organization or another nonprofit when the donor dies.
Other findings from the study:
- 14 percent of accounts saw no activity during the four-year period studied. (Hamond of the Community Foundation Public Awareness Initiative said that most community foundations have a policy under which they will start making grants from accounts that have been inactive for some period of time, often three years.)
- The median four-year average annual payout rate among all accounts studied was 11 percent.
- 42 percent of the donor-advised fund accounts that opened in 2017 had granted out their entire opening contribution by the end of 2020, and another 22 percent had granted at least half.
More Research on DAFs
The Institute for Policy Studies also recently released a series of studies critical of donor-advised funds. The institute is on record supporting tighter regulation of DAFs, saying “The rules around DAFs are broken.”
One of the studies found that donor-advised fund accounts managed by organizations with commercial affiliates such as Fidelity, Schwab, and Vanguard transferred at least $1 billion in 2019 from one donor-advised fund account to another, which the institute characterizes as an enormous amount of money cycling between giving vehicles rather than being distributed outright to charity. Such transfers also artificially inflate the payout rate claimed by DAF account managers, the institute stays.
Another study examined transfers from private foundations to donor-advised funds managed by commercially affiliated organizations, which count toward the requirement that foundations distribute at least 5 percent of their assets annually.
Such transfers amounted to more than $938 million in 2018, the institute said. “The dollars flowing from private foundations to DAFs make for a considerable amount of money diverted or delayed in reaching active charities,” the study states.