When It Comes to Donor-Advised Funds, the Median is the Message
posted on: Tuesday, June 05, 2012
By Kevin Laskowski
The Chronicle of Philanthropy’s biennial survey of 126 of the nation’s largest donor-advised fund (DAF) sponsors is out, and DAFs are doing booming business:
“A growing cache of charitable dollars is up for grabs in the nation’s donor-advised funds, which have accumulated tens of billions of dollars and are now worth more than they were before the recession.”
As a group, these sponsoring organizations held $24.2 billion in assets and gave away $5.4 billion in grants in 2011. That’s a whopping aggregate payout of 22 percent. By contrast, private foundations are legally required to make qualifying distributions amounting to 5 percent of non-charitable use assets annually, and most foundations are organized to do just that in perpetuity.
But this four-to-one drubbing is only visible in the aggregate. DAFs seem to pay out at spectacular rates, but a single DAF sponsoring organization administers hundreds, even thousands, of such funds. For all its flaws, and they are many, the Treasury Department’s recent study on donor-advised funds understood this, stating, “Individual DAF payout rates may vary widely, and aggregate payout rates may mask low payout rates (or even no payout) from a subset of individual DAFs.”
The study examined median payout rates and not only mean payout rates. The results were surprising. In 2006, the mean payout among DAFs was an impressive 9.3 percent, but the median DAF paid out 0.6 percent of assets in grants. That means that at least half of the nation’s 160,109 DAFs paid out less than 1 percent in grants in 2006. At least one quarter of DAFs paid out absolutely nothing in grants. DAFs administered by educational institutions looked especially poor. The median payout among them was zero percent.
Granted, these funds comprise a comparatively small portion of the DAF sector. The mean and median payouts of higher-profile sponsoring organizations, such as the commercial gift funds and community foundations, are substantially higher. However, the high performance of the biggest players can make up for a number of charitable laggards: 25 percent of even community foundation DAFs paid out less than 2 percent in grants in 2006.
How much has that picture changed, if at all, in recent years? The Chronicle points to the concerns of those who “still worry that donor-advised funds take in far more than they give away,” noting that, only a few years ago, “donor-advised funds were in the dirty dozen of IRS abuses.”
With lower barriers to entry, DAFs are a potentially democratizing force in philanthropy worth preserving. Rick Cohen has written at Nonprofit Quarterly:
“In doing so, DAFs are part of a movement in philanthropy that stands as an alternative to ginormous foundations created by millionaire and billionaire families whose grantmaking is determined by a handful of rich board members. In contrast, DAFs are, dare we say it, an instrument toward democratizing philanthropy, putting more philanthropic decisions into the hands of ordinary Americans who may not be charter members of the one percent club.”
However, when the Chronicle’s data show that DAFs rival their foundation cousins in size and scope, it’s not clear that DAFs are putting grant decisions into the hands of ordinary Americans. And when Treasury data demonstrate that DAFs can give very little for the tax deductions afforded to donors, it’s not clear that ordinary Americans get anything at all.
Given the number and diversity of DAFs and sponsoring organizations, field observers should study and report median payouts, which are as important as, if not more important than, mean payouts. This will hopefully induce DAF providers to compete in a way that does not allow them to coast on the performance of their best players. DAF providers should do what they can to encourage distributions in their agreements with donors, stating what will be done to move charitable dollars to actual charity if grants are not recommended in a timely manner.
The average DAF may be a force for philanthropy and democracy, but the median DAF is not, and that has to change.
Kevin Laskowski is research and policy associate at the National Committee for Responsive Philanthropy.Labels: community foundations, democracy, Donor-advised funds, Kevin Laskowski, Payout
The Chronicle of Philanthropy’s biennial survey of 126 of the nation’s largest donor-advised fund (DAF) sponsors is out, and DAFs are doing booming business:
“A growing cache of charitable dollars is up for grabs in the nation’s donor-advised funds, which have accumulated tens of billions of dollars and are now worth more than they were before the recession.”
As a group, these sponsoring organizations held $24.2 billion in assets and gave away $5.4 billion in grants in 2011. That’s a whopping aggregate payout of 22 percent. By contrast, private foundations are legally required to make qualifying distributions amounting to 5 percent of non-charitable use assets annually, and most foundations are organized to do just that in perpetuity.
But this four-to-one drubbing is only visible in the aggregate. DAFs seem to pay out at spectacular rates, but a single DAF sponsoring organization administers hundreds, even thousands, of such funds. For all its flaws, and they are many, the Treasury Department’s recent study on donor-advised funds understood this, stating, “Individual DAF payout rates may vary widely, and aggregate payout rates may mask low payout rates (or even no payout) from a subset of individual DAFs.”
The study examined median payout rates and not only mean payout rates. The results were surprising. In 2006, the mean payout among DAFs was an impressive 9.3 percent, but the median DAF paid out 0.6 percent of assets in grants. That means that at least half of the nation’s 160,109 DAFs paid out less than 1 percent in grants in 2006. At least one quarter of DAFs paid out absolutely nothing in grants. DAFs administered by educational institutions looked especially poor. The median payout among them was zero percent.
Granted, these funds comprise a comparatively small portion of the DAF sector. The mean and median payouts of higher-profile sponsoring organizations, such as the commercial gift funds and community foundations, are substantially higher. However, the high performance of the biggest players can make up for a number of charitable laggards: 25 percent of even community foundation DAFs paid out less than 2 percent in grants in 2006.
How much has that picture changed, if at all, in recent years? The Chronicle points to the concerns of those who “still worry that donor-advised funds take in far more than they give away,” noting that, only a few years ago, “donor-advised funds were in the dirty dozen of IRS abuses.”
With lower barriers to entry, DAFs are a potentially democratizing force in philanthropy worth preserving. Rick Cohen has written at Nonprofit Quarterly:
“In doing so, DAFs are part of a movement in philanthropy that stands as an alternative to ginormous foundations created by millionaire and billionaire families whose grantmaking is determined by a handful of rich board members. In contrast, DAFs are, dare we say it, an instrument toward democratizing philanthropy, putting more philanthropic decisions into the hands of ordinary Americans who may not be charter members of the one percent club.”
However, when the Chronicle’s data show that DAFs rival their foundation cousins in size and scope, it’s not clear that DAFs are putting grant decisions into the hands of ordinary Americans. And when Treasury data demonstrate that DAFs can give very little for the tax deductions afforded to donors, it’s not clear that ordinary Americans get anything at all.
Given the number and diversity of DAFs and sponsoring organizations, field observers should study and report median payouts, which are as important as, if not more important than, mean payouts. This will hopefully induce DAF providers to compete in a way that does not allow them to coast on the performance of their best players. DAF providers should do what they can to encourage distributions in their agreements with donors, stating what will be done to move charitable dollars to actual charity if grants are not recommended in a timely manner.
The average DAF may be a force for philanthropy and democracy, but the median DAF is not, and that has to change.
Kevin Laskowski is research and policy associate at the National Committee for Responsive Philanthropy.
Labels: community foundations, democracy, Donor-advised funds, Kevin Laskowski, Payout
posted by Kevin Laskowski at
3:00 AM
2 Comments:
An interesting article and much of what you’ve noted is directly on point, but I would suggest a couple areas of clarification;
There can be a vast difference in the underlying structure and grantee provisions within DAF programs, especially between the so-called commercial programs which have virtually unrestricted grantmaking capabilities to any nonprofit the donor elects, versus the provisions of University or Community Foundation programs for example where grantmaking may be more restricted. If college or university DAF programs were reviewed more deeply, we’d find that the majority of these programs have a requirement that either all the donors’ grants be directed to the university or university related causes - or at least some major percentage - and beyond that, upon the death of the donor all the assets are absorbed into the university endowment as a final gift. Many of these do not have the aspect of creating a legacy or succession for heirs that the commercial programs offer. I would argue therefor that within these more restrictive programs that the volume of grantmaking throughout the life of the account is marginalized by the fact the gift and ultimate grantee were established when the account was opened.
Community foundations were much similar years ago, but have subsequently become less restrictive in their policies, realizing that they had a needed to become more flexible in order to compete with the highly visible and popular commercial programs. This may explain why they appear slightly more successful than the universities in grantmaking activity.
Still, many of these programs struggle with a secondary issue; the ability to deliver engaging content related to community related causes and initiatives, and fail to fully engage and motivate their donors to support the local causes through active grantmaking. As a DAF host, the community foundations have as a unique differentiator their knowledge and connection to grantees and programs that are critical to the community, but have struggled in many cases to deliver concise content to donors within the DAF programs themselves to drive involvement and motivate grantmaking. The good news is, that the technology is finally available for these organizations to better support their DAF programs though enhanced program related content and grantee transparency, encouraging increased grantmaking and involvement by donors.
Excellent article Kevin,
By
William Hewitt, at 4:01 PM
Thank you, William. And thanks for that important addition. There are sometimes perfectly good reasons for why the statistics might look the way they do. We certainly shouldn't judge a vehicle by its worst performers. That said, we shouldn't coast on our best either.
Whether it's through community foundations rediscovering their unique value or better program-related content, as you suggest, or by some other means, the more we can do to engage donors to move money on to real charity sooner rather than later, the better off the sector and the communities it serves will be.
I'd be interested to hear how DonorFirst is helping the DAF sponsors it's working with do this.
By
Kevin Laskowski, at 9:29 PM
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