One of the more disingenuous arguments that supporters of donor-advised funds (DAFs) increasingly make is that DAFs help to “democratize philanthropy” by serving as vehicles for smaller donors. As evidence, they say that the size of the average DAF continues to trend down—to $162,556 in the latest report from the National Philanthropic Trust (NPT).
Leaving aside the bizarre notion that someone with over $160,000 to give away in charitable donations is in any way a small donor, the figures are misleading. And they point to the lack of transparency in the kind of aggregate figures the industry reports provide (or, indeed, in the 990s on which they are largely based). As critics frequently point out, whether describing account sizes or payout rates, the sweeping averages that industry leaders cite fail to provide a clear picture of how these giving mechanisms are truly functioning.
Regarding the question of donor size, it’s like the inverse of the old “Bill Gates walks into a bar” adage.
An updated version of that old saw might go, Elon Musk walks into a bar and all the patrons suddenly become billionaires (on average). The case of the DAF reports is the opposite: By crowding the bar with masses of small donors, they want us to believe Musk isn’t nearly as wealthy as he actually is, “because averages.” If you brought 350,000 people into Elon’s place and averaged their wealth, Musk’s worth would drop to a mere fraction of his $182 billion.
Similarly, in its recent annual donor-advised fund reports, NPT has been adding in literally hundreds of thousands of workplace giving accounts that are administered as donor-advised funds by American Online Giving Foundation (AOGF). Throw these into the mix and, poof, the size of your average DAF account shrinks dramatically.
These accounts are great vehicles for spurring and managing automatic payroll deduction contributions and employer-matching donations through workplace giving programs. And they are an entirely different animal than the mini-foundations that most DAFs have become. Participating employees do not stash hundreds of thousands or millions of dollars into charitable accounts to maximize their tax deductions: Virtually all of the money that comes into the accounts goes out to working charities in the same year.
In its most recent publicly available filing (fiscal year ending March 31, 2018), AOGF reported that its 352,552 funds received $598 million in contributions and granted $589 million to charities, or 99% of those contributions. At the end of its prior fiscal year, AOGF reported the total assets in its DAF accounts as only $983,686. Using the payout rate formula preferred by NPT and other DAF managers (current year grants divided by prior end-of-year assets), AOGF’s rate would be 59,995%.
Using a more rational formula suggested by Ray Madoff and James Andreoni, the rate would be a far more intelligible 98%. As Madoff and Andreoni point out in their working paper on the topic, the commonly used payout formula itself is another source of problematic data on DAF activity. But for our purposes, the point is that AOGF is clearly operating differently than most DAFs—it’s not warehousing wealth in any way, shape or form. Workers donate money from their paychecks to their preferred charities. By contrast, the rest of the DAF world’s average payout rate would be a mere 16% that year: In other words, 84% of available assets remain in the DAFs rather than being distributed to working charities. You can see how averaging these types of funds together presents a skewed picture of donors and their giving habits.
Lumping these hundreds of thousands of modest givers in with the overall DAF statistics allows NPT to vastly understate the average size of DAF accounts. This is especially true within the “national charity” category where NPT includes these workplace giving accounts. NPT claims that the average size of a DAF account for these sponsors in 2018 was just over $122,000. But if you take out those 352,552 AOGF accounts from the calculation, the size soars to just under $300,000.
And what about those crowds who flooded the bar? Using NPT’s formula, the average size of an AOGF account would be $26. Again, workplace giving accounts are not there to warehouse charitable assets, and should be counted in a category of their own. That would both give them their due and also highlight the ever-increasing accumulation of assets in the other DAF categories.
In contrast to the workplace giving accounts, the data for the other categories reveal a fundamental design flaw in DAFs: they have no mandated payout requirement. Donors get a tax deduction when they place funds in a DAF but have no incentive to move funds to an active charity.
Policymakers are considering new proposals to spur charitable giving—among them, a push to require DAFs to have minimum payouts to discourage the warehousing of wealth. This debate is clouded, however, by misleading and confusing data on what current DAF payouts actually are and who, exactly, is benefiting from the advantages these giving mechanisms offer.
The confusion is only compounded when all the public has to go on are reports based on overly broad averages instead of disaggregated data that would provide us with a more accurate picture of this form of charitable giving. The NPT’s reports, and others like it, give us a snapshot of the industry, but a very, very blurry one. We can and must do better.
Dan Petegorsky is coordinator of the Charity Reform Initiative at the Institute for Policy Studies.
Editor’s Note: IP reached out to the National Philanthropic Trust for a response to Dan Petegorsky’s criticisms. Below is the Trust’s statement:
“Emerging donor-advised fund (DAF) models, like workplace giving, attract and encourage people to engage actively in philanthropy. That means more dollars go to important causes. DAFs are remarkably flexible giving vehicles and we celebrate and promote the many different and innovative ways that DAFs can be used to advance philanthropy.
“We are always evaluating ways to evolve and improve the Donor-Advised Fund Report—including how to categorize each DAF sponsor. The DAF Report first noted workplace giving models in 2018 and has reported on their continued rise in popularity in the years since. We recognize this trend has a significant impact on the DAF sector and has implications for our peers in the nonprofit world. We welcome all suggestions, including reconsidering criteria for the DAF sponsor categories in future reports. We take seriously our responsibility to accurately report the data and make meaningful observations in the DAF Report.”