Many Donor-Advised Funds Don’t Disclose Executive Pay

Seven of the nation’s 11 largest donor-advised funds controlling more than $30 billion in assets don’t report the pay of their highest executives, according to an analysis by The Chronicle.

Donor-advised funds belong to a special category of charity that is growing fast. The funds are subject to federal pay-disclosure laws like every other tax-exempt group in the United States.

Experts say the funds probably aren’t doing anything illegal by not reporting executive pay, but many say they are violating the intent of federal rules and laws intended to bring transparency to the nonprofit world.

“This is not transparency. The public should know what’s going on,” says Dean Zerbe, a former aide to the Senate Finance Committee, where he investigated charities.

Donor-advised funds collect money from individuals who get an immediate tax deduction and then can channel that money to any charity they want at any time. Community foundations were among the first nonprofits to offer these charitable funds to donors and still collectively manage hundreds of millions of dollars in donor-advised funds. Today, however, many of the biggest donor-advised funds like Fidelity Charitable Gift Fund and the Vanguard Charitable Endowment Program are charities created by their for-profit affiliates.

These commercially affiliated donor-advised funds are a recent phenomenon, beginning in 1991 when the IRS recognized Fidelity Charitable Gift Fund as a charity. They have come under heavy pressure from critics who say they essentially are tax shelters for the wealthy — and fee-generating machines for their for-profit affiliates.

Donor-advised fund executives counter that their funds provide billions to charities every year and that their management fees are relatively small. They also say that they are following both the letter and the spirit of federal disclosure laws.

How It’s Done

The Chronicle examined the executive pay reported on the IRS Forms 990 of all the commercially affiliated donor-advised funds on its Philanthropy 400, a ranking of the national charities that raise the most from private sources. Most of those funds have contracts with the for-profit entity that founded them to pay for administrative, investment, and managerial support. Those management fees are disclosed on the funds’ 990 forms.

Those donor-advised funds are technically independent from their commercial affiliates — but in many cases their top executives are not.

Like some other top executives at donor-advised funds, Amy Danforth, president of Fidelity Charitable, isn’t paid directly by the donor-advised fund; she’s an employee of the fund’s commercial affiliate, Fidelity Investments. The management fees Fidelity Charitable pays to Fidelity Investments cover the salaries of Ms. Danforth and other employees who provide services to Fidelity Charitable. Those management fees are negotiated at arms length and voted on by the independent board of trustees, according to Anna Spangler Nelson, who chaired the Gift Fund’s Board of Trustees until March.

The arrangement is similar to that used by small charities or trade associations, which often hire management companies for administrative services. As a for-profit company, Fidelity Investments isn’t required to disclose Ms. Danforth’s salary. Management companies are exempt from pay-disclosure requirements as long as charities report total management fees.

A Few Exceptions

Only four of the 11 largest commercially affiliated donor-advised funds reported salaries for the top executives who run them.

The Schwab Charitable Fund and the Vanguard Charitable Endowment Program (the second and third largest commercial donor-advised funds in the country by revenue) reported paying their presidents $600,000 and $314,000, respectively, in calendar year 2013, according to the organizations’ 2014 Forms 990.

Renaissance Charitable Foundation, which is affiliated with Renaissance Administration LLC, a for-profit charitable-services provider in Indianapolis, reported paying its leader $89,292 in 2014. The Ayco Charitable Foundation reported paying John Mastriani, its president and a member of the Board of Directors, $8,500 in 2015, during which time he reported working two hours a week at the charity.

Nicole Acker, marketing manager at Vanguard Charitable, says her organization is independent from its commercial affiliate.

“We believe it is important to ensure that we keep our focus solely on our mission — to increase philanthropy and maximize its impact over time,” says Ms. Acker. However, she added that Vanguard Charitable receives “modest services donated by Vanguard.”

Other types of large donor-advised funds that aren’t affiliated with commercial businesses also disclose their pay. For example, the Silicon Valley Community Foundation, which operates a donor-advised fund and raises more money from private sources than all but four other charities, paid its executive director, Emmett Carson, $750,000 in 2014.

Exploiting a Loophole?

Paul Streckfus, editor of EO Tax Journal and a former IRS lawyer who specialized in monitoring charities, says he believes the donor-advised funds are using a shell game to exploit a loophole and avoid disclosing executives’ salaries.

“The charities are supposed to report the compensation of the charity, but if the charity can say that there is no compensation because the for-profit is paying it, in effect they’re getting past that rule,” says Mr. Streckfus, who previously worked as a tax-laws specialist in the IRS’s charity division.

Alan Cantor, a nonprofit consultant and vocal critic of commercial donor-advised funds, called attention to Fidelity’s pay practices in an opinion article in The Chronicle in December. Mr. Cantor says Fidelity’s “tortured, legalistic, and arrogant approach to public disclosure” deeply undermined its credibility.

Mr. Cantor and other critics of the way some donor-advised funds operate also view it as a conflict of interest for a commercial entity to pay a nonprofit executive’s salary. “Staffers at a nonprofit are paid to help the organization meet its mission. By contrast, the employees of a commercial entity are paid to help that entity make a profit,” Mr. Cantor says.

Victoria Bjorklund, a prominent tax-exempt lawyer who served on an advisory panel to the IRS about charity issues, disagrees. “There is nothing illegal or unethical about an independent board hiring a particular vendor through a management-services contract that is fair and reasonable in amount,” says Ms. Bjorklund, who is now retired.

Reporting Zeros

At some donor-advised fund organizations on The Chronicle’s list, the role of president or executive director is apparently a part-time occupation. Five organizations reported the head of their charity worked fewer than 30 hours a week and did not report any compensation.

Additionally, the Bank of America Charitable Gift Fund and the Raymond James Charitable Endowment Fund, are operated by institutional trustees and did not report any officers, presidents, or executive directors in their most recent 990s.

Marc Owens, the former director of the IRS’s exempt-organizations division, says the salary-disclosure rules were “hotly debated” within the IRS.

Mr. Owens says that the zeroes in the 990s compensation columns indicate that the nonprofit’s president or executive director essentially volunteered his or her time at the fund. “If the individual is paid, even if it’s on a part-time basis, it should show up on the Form 990,” says Mr. Owens.

Mr. Zerbe, who left Capitol Hill to be National Managing Director at Alliantgroup, which helps businesses find tax credits and incentives, also is skeptical that volunteers lead the donor-advised funds. “These things aren’t running on autopilot,” he told The Chronicle.

Mr. Zerbe, who helped craft the 2006 Pension Protection Act, which overhauled many of the laws governing nonprofits, says executive pay should be reported even if it isn’t necessarily legally required. If it isn’t listed on the 990, Mr. Zerbe says, it should be posted on the nonprofit’s website. “Salaries and compensation are a cornerstone of the 990,” he says.

Ray Madoff, a professor at Boston College Law School and cofounder of the institution’s Forum on Philanthropy and the Public Good, believes the IRS should take a closer look at how donor-advised funds report their pay. She says some of the funds are clearly circumventing the intent of Congress.

“Congress mandates the reporting of salaries, and it doesn’t just mandate the reporting of expenses,” says Ms. Madoff.

Executives Respond

The Chronicle contacted representatives of all the donor-advised funds mentioned in its study.

Representatives of the Morgan Stanley Global Impact Funding Trust, U.S. Charitable Gift Trust, the Bank of America Charitable Gift Fund, and the Raymond James Charitable Endowment Fund declined to comment or did not respond to repeated requests for comment from The Chronicle.

The chairwoman of Fidelity Charitable’s Board of Directors, Anna Spangler Nelson, emphasized the efficiency gained by using Fidelity’s resources and skills but did not provide more details on how the charity’s president is paid.

The board’s overarching concerns, says Ms. Spangler Nelson, are low costs and quality services.

“Compensation is part of the overall service-provider fee, which Fidelity Charitable arranges with Fidelity,” Ms. Spangler Nelson says, and is “evaluated and negotiated at arms’ length and voted upon by the independent trustees.” She adds that the board does not evaluate salaries and that she does not personally know what president Amy Danforth earns for her role at the charity.

Fidelity Charitable attracts more in charitable donations than any other nonprofit except United Way Worldwide, according to The Chronicle’s annual Philanthropy 400 rankings. It raised more than $3.8 billion in 2014.

Goldman Sachs, in a statement to The Chronicle on behalf of three organizations — Ayco Charitable Foundation, Goldman Sachs Philanthropy Fund, and Goldman Sachs Gives — stressed that it follows 990 instructions and that all of the individuals administering those charities are full-time employees of their affiliated for-profit company.

Understaffed Watchdog

Even if some IRS officials are privately frowning on the pay-disclosure practices of some donor-advised funds, Marc Owens doesn’t think the agency will spend much time focused on it. Simply finding instances in which executives should have reported a salary would require the IRS to look at things like employment agreements and annual evaluations that explain how their pay is structured.

Says Mr. Owens, “The IRS really doesn’t have the resources to wrestle with issues like that.”

Note: An earlier version said Fidelity Charitable’s salaries were negotiated at arms length and voted on by the independent board of trustees. It should have said management fees, not salaries. This article has also been updated to reflect the fact that Vanguard Charitable receives some services donated by Vanguard.

Executive Pay Is Often Unknown at Large Donor-Advised Funds

The Chronicle analyzed IRS data on all of the commercially affiliated donor-advised funds on the Philanthropy 400. Unlike other large charities, most of those funds don’t report the pay of their top executives. Representatives of the funds say that reporting the overall management fees paid to commercial affiliates satisfies all disclosure laws, but some experts say the funds are exploiting a loophole.

* May not include additional charges on individual funds for investment management