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Outside the Box: Donor-advised funds like Fidelity’s are starving charities of the money they need

Once upon a time, charity in the United States meant pitching in to help a friend or a neighbor in need. It meant local organizations feeding the hungry, housing the homeless, treating the sick, or cleaning up parks.

These days, it often means multimillionaires, billionaires, and the institutions that serve them collecting splashy headlines and big tax breaks—often without even supporting real working charities.

This July, the Associated Press reported that Fidelity Charitable, a manager of donor-advised funds, had given out a record $4.8 billion in grants in the first six months of 2022. These numbers are indeed impressive, but they require a heavy dose of extra context.

Donor-advised funds, or DAFs, allow wealthy donors to offload assets such as stock and real estate without incurring capital-gains taxes. At the same time, it scores them a tax deduction for their donation. Like private foundations, the DAFs are then supposed to distribute those assets to working charities. 

But unlike private foundations, there is no legal requirement for DAFs to pay out their funds to working charities ever—so the civic benefit from these publicly subsidized gifts can be delayed indefinitely. Meanwhile, the donations sit in the sponsors’ accounts, earning investment income—as well as fees for the for-profit investment firms that run them.

Fidelity Charitable is part of a system that diverts revenue from working charities. 

Fidelity Charitable is the nonprofit arm of the Fidelity Investments financial services firm, a for-profit company. It’s the largest single recipient of charitable contributions in the United States, as well as the second-largest warehouse of charitable funds in the country. But because it’s linked to the company’s for-profit business, Fidelity is unavoidably invested in these assets staying put and earning income.

While Fidelity Charitable released information about how much it has given this year, it said nothing about how many donations it has received. Perhaps this is because it would be immediately apparent that incoming contributions are coming in much faster than grants are going out. 

Over the past five years, on average, for every dollar Fidelity has taken in, its DAFs have given out just 63 cents in grants to charity. This means that Fidelity’s asset base is becoming astoundingly large. And those assets earn interest, adding to the pile still further.

The amount of money coming in dwarfs the amount going out.

Institute for Policy Studies

On its 2020 tax form, the most recent available, Fidelity Charitable reported that it gave out $7 billion in grants. But it also took in nearly $11 billion in contributions and earned $1.5 billion on its investments, for total revenue of more than $12 billion. That $5 billion surplus went back into Fidelity’s asset base, adding to a stockpile that is currently worth an estimated $50 billion—second only to the Gates Foundation.

Fidelity told the AP that “most” contributions are paid out in five years, but its own reporting reveals that doesn’t include the income earned on those contributions—and that a chunk of the principal still lingers many years later.

DAF accounts that pay out quickly are covering for those that pay less—or nothing. 

Some DAF account holders do try earnestly to grant out the money at a good pace, but it is perfectly legal for others to let the money sit forever. 

Fidelity touts high payout rates for the DAF accounts it manages. But—aside from other problems with its methodology—these rates are aggregates, measured across their entire asset base. These aggregates can mask a wide variation in payout rates for individual accounts, including accounts that pay out very little—or even nothing at all. Evidence suggests that when you look at individual DAF accounts, typical payout rates are abysmally low.

In addition, a sizable chunk of Fidelity’s grants go not to charities, but to other DAFs. In an earlier analysis, we found that Fidelity Charitable’s DAF-to-DAF giving represented 7% of its granting in 2019 alone—a hefty percentage for money that is theoretically supposed to be benefiting the public.

Our charitable giving system desperately needs reform.

What’s critical to measure is whether Fidelity’s grants offset the money it’s storing up—and the money it’s effectively drawing away from operating nonprofits. The truth is, they do not. 

DAFs were codified by the IRS as publicly subsidized charitable organizations because the money in them was supposed to serve the public benefit. But they have been distorted, used to warehouse money designated for charity while providing large tax breaks to their disproportionately wealthy donors. And their assets continue to build while working charities struggle for funds.

Fidelity is hardly alone. For the past three years, six of the top 10 charities have been DAF sponsors.

In our recent report, Gilded Giving 2022, we lay out a set of reforms that would ensure that the money in DAFs actually flows out to working charities as it is supposed to. We recommend that they should pay out any donations in full within three years, along with any investment income earned on those donations. And they should publicly report and account for their assets.

The DAF industry wants no part of it. When the AP asked Jacob Pruitt, the president of Fidelity Charitable, about potential reform, Pruitt demurred, saying he worried about “unintended consequences.” 

We would argue that the systemic design flaws allowing DAFs to hoard money are themselves the worst kind of unintended consequences, and urgently need fixing.

Chuck Collins directs the Program on Inequality at the Institute for Policy Studies. Helen Flannery is an IPS associate fellow. They are co-authors of the IPS report Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy.

Further reading

‘Inequality has been rising for quite some time, but the pandemic supercharged it’

How Wall Street and Silicon Valley are worsening housing inequality—and how to fix it

How state lotteries transfer wealth out of the poorest communities

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