The latest on donor-advised funds

For those of you who have been following donor-advised funds (DAFs), you all know that they have been experiencing tremendous growth in funds for the past few years. In fact, the National Philanthropic Trust reported that at the beginning of 2019, the available funds had increased to $142 billion, an annual increase of 16%. If we were to assume that the funds increased again during 2020 by 15%, that would mean we’re starting 2021 with over $160 billion available to charities. The report also indicated that 870,000+ accounts were accounted for at the end of 2019, so it’s highly likely that we have tipped over one million accounts into 2021.

If you aren’t familiar with DAFs or need a refresher on them, we have you covered. Donor-advised funds (DAFs) act as centralized vehicles to allow donors to make an irrevocable contribution of personal assets. Therefore, once you donate, that money is gone; you can’t touch it again.  Donors receive an immediate tax deduction, then recommend grants from the fund over time. DAFs are the fastest growing form of charitable spending in America, which is why they have been making headlines throughout 2020. The major national players are Fidelity, Schwab, and Vanguard Charitable.

Last year, Fidelity and Schwab, two major players in this space, have made efforts to make DAFs become accessible to more households by ending DAF account minimums. According to data from the Indiana University Lilly School of Philanthropy, the average American household donates $2,600 annually to charity. Ending their $5,000 account minimums would allow average donors to participate in funds they would otherwise find inaccessible, especially given that other DAFs such as Vanguard Charitable and National Philanthropic Trust require $25,000 minimums.

This remarkable growth for DAFs, however, has been met with some controversy during the COVID pandemic. In 2020, Fidelity Charitable’s donors directed $9 billion to charities. That figure by itself sounds amazing, but critics were quick to bring attention to the fact that there was a total inflow of $14 billion to Fidelity that same year. That would mean that there’s still $5 billion sitting idle in the DAF that otherwise could have gone towards COVID relief efforts. An important distinction between DAFs and private foundations is that DAFs are set up through community foundations, which means they legally do not have minimum payout requirements. Those outspoken against DAFs in the past have argued that they are heavily subsidized by the federal government, yet those funds aren’t being immediately distributed to causes during such a heightened period of need. Moreover, critics argue that because DAF managers can charge management fees and invest the money and assets in these funds, there is reason to believe they aren’t as motivated as working charities to see these resources put to immediate use.

To address this concern, Fidelity and other DAF managing organizations have stated that the percentage of their assets that donors direct to charity far exceeds the 5% minimum annual payout required of private foundations. However, researchers James Andreoni and Ray Madoff have published a paper arguing that the formula DAFs use to calculate their payout rates has a tendency to overestimate the actual payout rate by more than 50%. The backbone behind this argument is that the formula doesn’t factor in investment gains and new contributions that would dilute the percentage rate of payouts because only the asset balance at the beginning of the year is considered for grant payouts.

On the flip side, even if we were to go with Andreoni and Madoff’s adjusted payout rate of 14.7% compared to the 22.4% derived from the conventional formula, it would still far exceed the 5% minimum payout requirement in place for private foundations. In addition, the overall trend of DAF grantmaking has been progressing, with a 31% increase in individual grants and a 24% increase in funds granted from 2019 to 2020. Regardless of the different stances on the efficacy of DAFs, two things are clear: DAFs are the fastest growing form of charitable spending in America, and they are here to stay. Even if a policy change were to be enacted on DAFs, it would hypothetically only serve to benefit charities, as the most obvious amendment would be a minimum required payout.

As a nonprofit, it is imperative that your organization capitalizes on the opportunity to further your mission by acquiring DAF donations. With more movements putting DAFs in the spotlight and pushing for more accountability, it makes more sense now than ever for nonprofits to take initiative by working with DAFs to increase public trust through messaging. This could mean pushing for complete transparency by disclosing all contributions or quantifying your organization’s impact by employing statistics and case studies that are readily available to the public.

One movement that has sparked a considerable following is the #HalfMyDAF campaign founded by David and Jennifer Risher. In 2020, #HalfMyDAF was launched with $1 million dollars and ended up moving over $8.6 million from DAFs to nonprofits in just 5 months. This year, #HalfMyDAF has over $3 million to give. The goal is simple: donors pledge to distribute at least half of their DAF account by September 30th. The donor then names the nonprofits that they wish to nominate for a match. Match recipients are randomly selected in two rounds, occurring in May and September. The more donors who commit to #HalfMyDAF and give to your organization, the greater your chances of receiving a match. Every donation from a unique donor increases your organization’s chances of receiving a matching grant.

If you are interested in learning more about DAFs, about how to make it easy for DAF donors to give, and how to become eligible for matching grants from #HalfMyDAF, we will be hosting a webinar led by the Rishers themselves on March 9th.

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