Big Giving, a Down Market, and Continued Calls for Reform: The Latest in the DAF Debate

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Whenever there’s volatility in the stock market, nonprofit leaders brace themselves for depressed giving, while also keeping an anxious eye on their shrinking endowments. These fears were compounded across the first half of 2022, as severe inflationary pressures gave donors another reason to dial back support.

It’s against this fraught backdrop that two massive donor-advised fund (DAF) sponsors released reports that seem to fly in the face of this conventional wisdom.

On July 19, Schwab Charitable announced that grants through its DAFs were up 27% to over $4.7 billion in its 2022 fiscal year, which ended on June 30. Donors supported 117,000 charities through 993,000 grants, a 24% increase in the number of grants to nonprofits versus fiscal year 2021. A day later, the country’s largest grantmaker, Fidelity Charitable, reported that its donors recommended $4.8 billion in grants in the first half of 2022, “up 11% despite inflation and market cooldowns.”

While inflation and the down market are clearly squeezing nonprofits and everyday givers, the reports suggest that DAF donors stockpiled wealth during the boom times, giving them relatively healthy account balances to work with, even amid escalating prices and poor market performance. This, along with responding to the war in Ukraine, likely explains the increased giving over the first six months of 2022 — and why fundraisers should make it a point to engage with community foundation DAF managers who can suggest nonprofits to account holders.

At the same time, DAF critics take little comfort in the “stash it away for a rainy day” defense, continuing their criticisms that these funds are enabling the stockpiling of wealth. The reports come at a time when those critics are reiterating calls for reform, based partly on the fact that DAF account holders receive immediate tax benefits but aren’t mandated to disburse funds to nonprofits on any timeline. In fact, on the same day that Schwab’s announcement hit the wires, Charity Reform Initiative (CRI) at the Institute for Policy Studies published a report on the increasingly top-heavy nature of modern philanthropy, the relentless growth of DAFs, and the threat these trends pose to the charitable sector and the public interest.

Let’s review why Schwab and Fidelity’s DAF account holders were well-positioned to disburse funding throughout the first half of 2022.

“Insulation from market pressures”

Fidelity’s press release notes that “donor-advised funds can offer some insulation from market pressures, which could be contributing to the continued growth in granting from Fidelity Charitable despite the current market dip.” And while there are many ways in which a donor can move money through a DAF, let’s picture a common scenario in which an account could be protected from market volatility.

Imagine a donor contributed appreciated stock before the downturn (donors often prefer to contribute stock instead of cash because they can avoid capital gains taxes). The fund manager — it could be a financial institution like Fidelity or Schwab, or a community foundation — immediately would have liquidated the stock and put the proceeds into an investment vehicle based on the donor’s risk tolerance. In our example, let’s say the donor chose a low-risk money market fund to minimize losses in the event of future volatility. 

Hundreds of thousands of donors were making these types of contributions and reaping the immediate tax benefits long before the S&P peaked in late December 2021, so by the time the market started nosediving a month later, they were already sitting on large account balances. Similarly, donors who initially placed their money in a higher-risk fund may have seen a decline in recent months, but the fund’s balance as of March 2022 may still have been higher than when they opened it three, five or eight years ago. 

On the other hand, a donor with more long-term goals could have put their money in a high-risk fund only to see it plummet in early 2022. But the big takeaway from the Fidelity and Schwab accounts is that, on the whole, donors were able to step up in the first half of the year because they savvily funded their accounts prior to the downturn.

As for the inflation issue, some economists fear that we could be facing a “lost decade” for stocks, akin to what happened in the 1970s, during which the S&P generated 6% returns, only for investors to see their gains wiped out by a 6.8% inflation rate over the decade. While this is the stuff of nightmares for people whose retirement savings are tied up in the market, DAF dollars have already been earmarked for charitable donations. Donors can’t convert it back to cash to pay for a tank of gas or a condo in Boca Raton. The main question is whether donors will disburse it to nonprofits now, sometime in the future, or at all, since they aren’t legally compelled to make payouts.

Continued calls for reform

The idea that piling a bunch of money into a DAF for a convenient tax break and giving it away later even as the market dips is likely cold comfort for critics of these funds, who would prefer that money make its way to either charities or public coffers in a timely manner.

On July 19, the Charity Reform Initiative released “Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy,” the latest in its ongoing examination of how wealth inequality and wealthy donors’ penchants for tax-free giving to DAFs and their own private foundations creates an increasingly top-heavy charitable sector. The report argues that these trends mean less money makes it to the public sector and charities on the ground, while the wealthiest givers are increasingly able to use philanthropy to support their narrow interests. (CRI director and report co-author Chuck Collins is an occasional contributor to IP.)

The report found that from 2000 to 2018, the proportion of households giving to charity decreased from 66% to under 50%. In 2019, households earning $200,000 or more accounted for 67% of all charitable deductions, with “ultra-wealthy” donors channeling support through their own private foundations and DAFs. A year later, for the first time, donations to DAFs were equal to contributions to private foundations, with both receiving roughly $48 billion from donors.

“If we continue on our current trajectory, an ever-greater share of charitable dollars will be diverted into wealth warehousing vehicles rather than going to nonprofits serving critical needs,” the report reads. “Wealthy donors will increasingly be able to use their charitable giving to opt out of paying their fair share in taxes to support the public infrastructure we all rely on.” (See IP’s summary of the DAF debate here.)

It’s worth noting that the data varies when it comes to how fast and how much donors move grants through DAFs. According to the National Philanthropic Trust, DAF payouts have averaged more than 20% every year since 2015, a figure that’s far higher than the 5% required of foundations.

But others dispute these summary figures, since they fail to capture nuances and variations in the data. To this point, back in March, the Donor-Advised Fund Research Collaborative’s Danielle Vance-McMullen and Dan Heist published findings documenting the full breadth of DAF holders’ giving strategies. Having reviewed the activity of 13,000 DAF accounts between 2017 and 2020, they found that 52% had four-year average payout rates between 5 and 49%, while 35% paid out less than 5%. “In the end, there is no ‘typical’ DAF donor,” Vance-McMullen and Heist said. “There are several types of DAF donors.”

Collins and co-author Helen Flannery propose a series of reforms in “Gilded Giving,” including requiring paying the entirety of any donations within three years after donations have gone into the DAF and mandating that donations to and from DAFs should be publicly disclosed and reported on an account-by-account basis in a way that protects anonymous givers. They also call for an increase in the private foundation annual payout requirement from 5% to 10% of assets.

Check in with your community foundation

The Fidelity, Schwab and CRI announcements are more than just a collection of data points. They represent the latest in an ongoing series of salvos between DAF providers and reformers.

The not-so-subtle takeaway from the first two press releases is that their donors stepped up during a time of extreme economic uncertainty. In fact, both releases imply that DAF donors gave more than in 2021 precisely because nonprofits were being battered by inflationary pressures and diminishing endowments. The Schwab press release cited a donor, Charles R. who said, “As much as possible, we’re trying to do this not by diverting grants that would have gone to other hot spots and areas of need, but rather, adding to our account with new contributions.”

On the other hand, individuals like Collins, Flannery, author Edgar Villanueva, and Crisis Charitable Commitment Founder Alan S. Davis argue that DAFs encourage donors to stockpile wealth since they get an immediate tax break without facing any requirements to move funds to working profits. Collins’ “Gilded Giving 2022” report claimed that if foundations had a 10% minimum payout and DAFs had a three-year mandated payout between 2018 and 2020, at least $193 billion in additional donations would have ended up in charities’ coffers.

Various pieces of reform-minded legislation are currently pending in Congress, but it’s anyone’s guess whether they’ll make it to President Joe Biden’s desk. In the meantime, nonprofit fundraisers can find comfort in the fact that while everyday donors are making daily trade-offs between writing a check to a nonprofit or buying a new car, those who give through DAFs are sitting on funds that are already set aside for charitable purposes, and in many cases, are protected from severe inflationary pressures and market fluctuations.

This doesn’t mean they should ring up notoriously impenetrable sponsors like Fidelity and Schwab. It does, however, underscore the importance of networking with DAF fund managers at community foundations. As IP’s DAF Explainer notes, “Building relationships with community foundations in your area will put your nonprofit on the radar of those who interact with local DAF account holders. If a DAF holder asks their community foundation or fund manager for advice on which nonprofits are doing good work on a certain issue, your organization might get a mention.”

The other big question is the extent to which donors contributed to their DAFs during the turbulent first half of the year, when their assets were hemorrhaging value. The jury is still out on this one. Fidelity told the Associated Press that the amount of money invested into DAFs in 2022 so far would not be available until the end of the year.