Donor Advised Funds from a Community Foundation Perspective
This blog was originally posted by the United Philanthropy Forum.
Foundations in Michigan and throughout the United States are re-examining many longstanding practices and ways of working as this is a critical time for our sector to reflect and reimagine.
The devastating effects of the pandemic have underscored the depth of long-standing racial and economic disparities and accelerated conversations on the roles philanthropy can play to advance equitable systems in partnership with nonprofits and in collaboration with other sectors. We’re engaging in needed self-examination to ensure philanthropy is effectively leaning in not only through this crisis but looking long-term, informed by solid evidence and data.
To help advance these important conversations, the Council of Michigan Foundations (CMF) recently released a series of research reports examining the practices of foundations in our state, specifically around the issue of payout. The final installment was released this June, studying the activities of Michigan-based donor-advised funds, better known as DAFs. The report, Analysis of Donor Advised Funds from a Community Foundation Perspective, examined DAF payout rates, investment returns, management fees, and related metrics.
I was pleased that many philanthropic leaders found the report valuable and used its findings to launch discussions about their grantmaking practices. At the same time, I am concerned that some advocates have stretched the conclusions of the DAF report too far and are using selected data to urge sweeping policy changes to the sector. From my perspective, the report’s key findings are too state-specific to be applied nationally in the way these advocates suggest.
To help inform the dialogue, I thought it would be helpful to explain why CMF commissioned the DAF report, what we consider its key conclusions and the next steps we recommend to construct a more complete picture of DAF operations throughout the United States.
Why the Council of Michigan Foundations Commissioned This Research
Michigan is fortunate to have a diverse and active philanthropic sector, including long-established private foundations built on the legacies of pioneering American industrialists and community foundations working deeply in their regions as conveners, connectors and collaborators.
CMF commissioned the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University to conduct three studies exploring facets of their payouts and practices. The DAF study released this summer was the third in that series.
- The first study explored payout rates and investment returns for private foundations in Michigan.
- The second examined similar metrics for community foundations in our state.
- This third installment—the one that has received so much attention lately—explored similar questions for donor-advised funds.
We hoped gathering this information would inform data-driven discussions among CMF members and encourage them to explore how they could make a greater impact. We also hoped others in our sector outside of Michigan would be inspired by our experience and commission similar reports in their states, generating additional data to inform evidence-driven discussions across the nation.
What Did the DAF Analysis Find?
Analysis of Donor Advised Funds from a Community Foundation Perspective found that community foundations across Michigan sponsor more than 2,600 DAFs, with total assets exceeding $500 million. I knew our community foundations were active in this area, but I was surprised by the extent of DAF activity in our network.
The study also made several important findings beyond the headline numbers:
- Most Michigan community foundation DAFs are active in a typical year. Nearly two-thirds of them made contributions to charitable organizations in each of the four years included in the study (2017-2020), and 86% of DAFs made at least one grant during the four-year study period.
- Michigan DAF activity increased in 2020, likely in response to needs created by the COVID pandemic. More Michigan DAFs made grants in 2020 than in any other year. The study reported that total grantmaking increased by 19.6%, compared to 2019.
- DAF payout rates vary. For 2020, the median payout rate of Michigan DAFs was 3.3%. However, nearly one-third paid out more than 9% of their total assets.
- A small number of Michigan community foundation DAFs are inactive. About 8% of DAF accounts had no activity during the four-year study period and they held about 3% of total DAF assets in the state.
What Questions Did the Analysis NOT Answer?
The study made many important findings, including some that inspired immediate action (see next section for details). However, the research was limited in scope, and I caution against drawing conclusions that aren’t supported by the data.
Here are some important questions that were beyond the scope of the research:
- Are DAF payout rates in Michigan similar to payout rates for DAFs throughout the United States? Because the study explored account-level detail for Michigan DAFs only, we cannot answer this question. In fact, the Michigan DAF landscape and national landscape are quite different. Nationally community foundations hold more than twice the assets in DAFs as a share of foundations’ endowments compared to those in Michigan. Sector leaders need more data before drawing conclusions about DAF payout rates nationwide.
- Are DAFs sponsored by community foundations more or less active than DAFs housed at commercial providers, like The Schwab Charitable Fund and Vanguard Charitable Endowment Fund? Again, we do not know. This study looked only at community foundations and cannot generalize beyond that group.
- Are DAF grants helping to advance equity? The analysis focused exclusively on financial data like payout rates and investment returns—a key first step in this groundbreaking account-level analysis. It did not investigate how grants were used, and whether those grants had a strong equity focus—a key next step as discussions and research continues. This may be the most important question of all and is core to our work at CMF: putting equity at the center as we lead, strengthen and support Michigan’s community of philanthropy.
- Why are some DAFs inactive? According to the analysis, about one in twelve Michigan DAFs has been inactive during the past four years. It is important to understand the context of these DAFs, endowed vs. non-endowed or “spendable.” There is a vast array of DAFs with various intended purposes, whether it be for long-term charitable capital, short-term use or a hybrid of both. The complexity of DAFs helps to underscore the issue of context and why we need to fully unpack and understand this issue nationally before moving toward reform.
How is the Council of Michigan Foundations Acting on This Research?
CMF learned a great deal from the research series commissioned by the Johnson Center. Its findings have prompted new discussions within the Michigan community of philanthropy and suggest a robust future research agenda to answer questions that have not yet been investigated.
The research has also prompted CMF to take immediate actions supported by the existing data. These are some of the most important:
- CMF has continued to encourage our member foundations to adopt inactivity policies for all DAFs they sponsor – a majority of which already do in alignment with recommendations adopted by the National Standards for U.S. Community Foundations.
- Through conversations with policymakers, we are encouraging that the U.S. Treasury Department create a national database that will report on DAF activity and payout rates across the country. Gathering this information will help facilitate a data-based discussion about DAFs nationally.
- We are working with our member foundations and other sector leaders to share best practices for advancing equitable systems, lift up and share success stories, and explore how DAFs are supporting communities. We are also engaging with members to explore public policy changes that may enhance DAF impact and accountability.
I believe these initial steps are important, and I recognize that far more is needed. Please contact me if you are interested in learning more about any of the initiatives I have described. I also invite you to share with us how you are thinking about this data in your own work.
I look forward to working with you to strengthen our philanthropic sector and create a more equitable world.
President and CEO
Council of Michigan Foundations