Giving through donor-advised funds continues to grow as evidenced by Fidelity Charitable’s announcement last week that its donors directed $9 billion to charity in 2020. But critics of donor-advised funds are eager to point out another number: the $14 billion Fidelity donors put into their accounts last year.
The $5 billion gap between inflows and outflows was another stark reminder of what’s wrong with donor-advised funds, critics say.
In a series of tweets, philanthropist and donor-advised-fund critic John Arnold wrote that giving to nonprofit organizations was stagnant even as money in donor-advised-fund accounts continued to swell.
“I fear that, increasingly, donations to DAFs are coming at the expense of charities,” Arnold wrote.
Arnold is part of a coalition of philanthropists, academics, and philanthropy leaders who are pushing Congress to provide incentives for donor-advised-fund holders to more quickly distribute money in their accounts to operating charities. When donors contribute to a donor-advised fund, they get an immediate tax break, but they are not required to direct the money to a charity in a specific time frame.
Fidelity and other organizations that manage donor-advised funds say the percentage of their assets that donors steer to charity far exceeds the 5 percent minimum annual payout required of private foundations.
However, two proponents of higher payouts have circulated a working paper that suggests that the formula donor-advised funds commonly use to calculate their payout rates typically overstates payout by 53 percent to 56 percent. The research paper, “Calculating DAF Payout and What We Learn When We Do it Correctly,” by James Andreoni, an economics professor at University of California at San Diego, and Ray Madoff, a law professor at Boston College Law School, says that many organizations calculate payout by dividing grants made during a year by the asset balance at the beginning of the year. This methodology, they say, neglects to consider investment gains and new contributions made over the course of the year that would push down the payout percentage rate.
Using their preferred formula, Andreoni and Madoff pegged payout rates at 14.7 percent, compared with 22.4 percent using the industry-preferred method. Even the 14.7 percent figure most likely exaggerates the payout rate, they argue, because it includes transfers from one donor-advised fund to another, rather than money disbursed to a soup kitchen, a museum, or other working charities.
In response, Fidelity didn’t dispute those calculations but maintained that in aggregate, its donors put a higher percentage of money toward charity than most foundations.
“Regardless of the method used to calculate, we have high double-digit distribution rates,” Stephen Austin, a Fidelity spokesman, wrote in an email. “We have strong policies to drive active grant making and an engaged donor based committed to put the funds in their charitable accounts to work.”
Fidelity declined to provide recent asset figures. It reported more than $31 billion in assets in its fiscal year that ended June 30, 2019.
In its summary of 2020 charitable giving, Fidelity said that 76 percent of money deposited in the donor-advised-fund accounts that it manages is distributed to charity within five years and that 93 percent of its donors gave from their accounts last year.
That doesn’t impress Andreoni. Using the 76 percent figure provided by Fidelity, he likened the money sitting in an account after five years to unused inventory. If a factory manager left goods sitting in inventory for five years, “that inventory manager would be fired in no time,” he says.
Foundations vs. Donor-Advised Funds
Fidelity’s $9.1 billion in grants last year likely made it the nation’s largest grant maker for the third straight year, ahead of the Bill & Melinda Gates Foundation. The Gates Foundation has not made its 2020 grant making totals public. In recent years, grants have hovered around $5 billion. Last year, the foundation committed an additional $1.75 billion in response to the pandemic.
Foundations are required to steer 5 percent of their assets each year to charities and related overhead costs. Donor-advised funds have no such requirement. Foundations have more stringent reporting requirements. And donor-advised funds generally offer more favorable tax treatment for donors making contributions.
While the $9.1 billion Fidelity donors steered to charities is a huge sum, Andreoni is more focused on the money that remains parked in Fidelity accounts. Society loses, he says, when money earmarked for charity sits in an account.
“That money went into the into the pile and will be buried by more money next year and more money the year after,” he says. “If this pattern goes on forever, we’re going to have a gargantuan sum of money that just keeps getting bigger.”
At the end of 2019, donor-advised-fund organizations controlled about $142 billion in assets. That year, donors directed about $27 billion to charities through their donor-advised-fund accounts, according to the most recent study by the National Philanthropic Trust, a fund sponsor.
Donor-advised-fund proponents like Steven Woolf, senior tax-policy counsel of the Jewish Federations of North America, say the funds are so easy to set up and manage that they have encouraged greater giving. Organizations like his and Fidelity have the financial acumen to take illiquid assets, like a stake in a privately held business or artwork, and convert them into charitable dollars.
The investment returns and contributions that help donor-advised-fund accounts grow, Woolf says, provide a reservoir of cash for nonprofits in times of need. Donor-advised account holders are the first donors federation members turned to in the early months of the pandemic because they had already earmarked money in their accounts for charity.
“They are a source of ready funds that have really provided a safety net,” he says.
