The Growing Power of DAFs: Here’s what you need to know

By Jamie Philippe, CFRE, Vice President

Donor-advised funds, or DAFs, have been at the top of mind for many people since the release of the Giving USA report for philanthropy for the year 2020 (check out our blog here for an overview) and especially now with Giving USA’s groundbreaking report on DAFs which was released on November 11, 2021. DAFs have also received extra attention this year due to the bills that have been introduced in the U.S. Senate that aim to place new restrictions on DAFs. However, for many, there is a real lack of clarity around the current status of DAFs, and they raise more questions than answers.

For development professionals who oversee fundraising for their organization, the question is how to engage DAF-holders. Given the stunning growth in DAFs over the past five years, there are no signs of their popularity slowing down, so let’s unpack and demystify this hot trend. What are the rules around DAFs? What are the benefits of a DAF? How can your organization gain access to them?

What are DAFs? Why are they so popular?

The National Philanthropic Trust defines donor-advised funds as a philanthropic giving vehicle administered by a charitable sponsor that allows donors to establish and fund the DAF account by making irrevocable, tax-deductible contributions to the charitable sponsor. Donors can then recommend grants from those funds to other charitable organizations. What makes DAFs so popular, and the fastest-growing form of philanthropy, is that they are so easy and flexible to set up.

More and more DAFs have low or no minimum account thresholds. Companies like Fidelity and Schwab now require no initial contributions for opening a DAF account. There is also no time limit, meaning that there is no rule that requires the money be donated to a charity within a specific amount of time.

No doubt that is why the number of individual DAF accounts continues to rise year over year and why they now total over one million. DAFs can be found at major fund companies, universities, community foundations and as employer-sponsored DAF accounts.

Here are some statistics that speak to the growing power of DAFs:

  • Grants from DAFs to qualified charities totaled an estimated $34.67 billion in 2020, representing an increase of 27% compared to 2019 and a new high
  • Contributions to DAFs totaled $47.85 billion in 2020
  • Charitable assets under management in all DAFs: $159.83 billion
  • Number of DAF accounts: over 1 million
  • Average size of DAF accounts: $159,019

It is important to note that while there are eleven times as many DAFs as private foundations, there are more assets in foundations than in DAFs. There are an estimated $159.83 billion in assets in DAFs, but an estimated $1.1 trillion in assets in private foundations. Although there is a lot of eagerness to access the funds in DAFs, we cannot overlook the even greater potential that lies in foundations.

 

What is the outlook for DAFs?

In all likelihood, DAFs will continue to grow in the coming years. With emerging models such as employer-sponsored DAF accounts that offer payroll deductions for charitable giving gaining traction, there are no signs of this trend slowing down. In addition, Fidelity and Schwab now offer no minimum requirements for opening DAFs which means they are removing barriers to access. As of 2020, the average size of DAF accounts is estimated to be $159,019, which is a 5.5% decrease compared to the previous year. It is likely that the average DAF account size will continue to decrease in the years to come as minimum requirements are removed for opening a DAF account.

Who is on the receiving end of DAF grants? The Giving USA Special Report found that education, religious and public-society benefit organizations attracted the most dollars. The study also found that giving to human services grew by 138% and giving to racial justice organizations more than quadrupled.

It remains to be seen how the current bills making their way through the U.S. Senate change or tighten restrictions for DAFs. To critics of DAFs, the issue is that there are no financial incentives to quickly donate the money, which means the money can end up sitting in accounts rather than being distributed to nonprofits and communities.

The Accelerating Charitable Efforts Act, proposed by Senators Angus King and Charles Grassley, would create new deadlines for funders to spend money held in DAFs and thus eliminate the possibility of the money simply sitting in accounts for years. If passed, these new restrictions and payout rules would have significant consequences for community and private foundations, along with hospitals, universities and large charities.

Proponents of DAFs, however, look at the payout rate for DAFs which has exceeded 20% for every year on record. The payout rate for 2020 was 23.8%, which is the highest on record since 2011. The payout rate illuminates how funds are not just sitting in accounts but are going back to the community.

What does this mean for your organization/nonprofit?

With this substantial growth in DAFs, it comes as no surprise that development professionals who are responsible for increasing their organization’s fundraising results always want to know, “How can my organization engage potential donors who have donor advised funds?”

Though the answer is not easy, here are a couple of tips for nonprofits:

  1. Once they give to you, you have their information and are free to thank them, contact them and begin to build a relationship.
  2. If the organization holding those DAFs has educational sessions or introductory sessions for nonprofits to speak to groups of DAF-holders, then perhaps your organization can participate in that session.

All in all, it looks like DAFs will be around for the foreseeable future, so it is important to have a solid understanding of what they are and what they could mean for your organization.

Contact an expert at The Alford Group here.

Order the Giving USA Special Report – Donor Advised Funds: New Insights