In light of ongoing criticisms of donor-advised funds (DAFs) and their growing popularity as a flexible giving vehicle, Philanthropy Roundtable interviewed one of the authors of a new research report, “The 2024 National Study on Donor-Advised Funds.” The report offers valuable insights into why these criticisms are unfounded. Equally important, the report demonstrates the myriad ways DAFs are used by donors to strategically support charitable causes, democratize giving and improve countless lives.
The authors gathered and analyzed a large dataset covering nine years of activity from more than 50,000 accounts, with over 600,000 inbound contributions to DAFS and more than 2.25 million outbound grants from DAFs. Overall, this report represents the most extensive independent study on DAFs to date.
To get a better sense of the report’s implications, we spoke with corresponding author Dr. H. Daniel Heist, an assistant professor of public administration and nonprofit management in the Romney Institute of Public Service and Ethics at Brigham Young University. Heist’s research focuses on charitable giving and philanthropy, especially donor-advised funds, as well as volunteering. His nine years of professional fundraising experience inform his research and teaching.
This section of the interview focuses on the payout trends of DAFs. The payout rate is the percentage of DAF assets granted to charitable causes annually. Observing payout trends is important because critics of DAFs often say donors do not distribute enough of their DAF funds quickly enough. This leads to misguided calls for arbitrary payout requirements placed on DAF sponsors or other restrictive measures. As this section of the interview will illuminate, median DAF payout rates are roughly double the 5% foundation payout requirement, while average payout rates are typically three to four times higher.
This is the second of three blog posts based on this interview. Read the first part here.
Q: The study uses a three-year average for payout rates. Can you explain how this addresses potential year-to-year fluctuations and why this particular time frame was chosen?
Heist: People don’t always give through a DAF on an annual basis. For example, a donor may make a contribution into a DAF at the end of one year and then make grants out of the DAF the next year or in subsequent years. So, tracking payout rates on a one-year basis gives you skewed numbers that don’t accurately reflect how the account is being used. We use a three-year average because it was the time period that most accurately captured how rapidly a DAF was granting out its assets.
Q: Among the various measures of payout rates, the study revealed three notable figures, 9%, 15% and 18%. What do these numbers tell us?
Heist: The 9% median payout rate for all DAFs includes all of the accounts that were inactive (0%) for a time period. That’s why it is lower than the other measures. Those inactive accounts are worth paying attention to, but they are generally newer and smaller than the rest of DAFs. If we look at DAFs that are actively granting, the median is 15%, meaning half of the DAFs are giving higher than this, and half are giving lower than this.
But when we take the average (mean) payout rate, we are adding up all of the payout rates and dividing them by the number of accounts. The fact that this number was higher (18%) and included the inactive accounts, tells us that there are a lot of DAFs that give really high rates, like 50-100%. These high payout rates bring the average of all DAFs up. Other payout rates on DAFs, like those reported by National Philanthropic Trust, calculate the payout rate based on all DAFs combined together. Their numbers will be higher than ours because they include some of the ultra-large DAF accounts that our study did not include. In effect, our calculations are very conservative.
Q: Has the average payout rate changed over time? If so, what does that tell us?
Heist: Yes, payout rates have slightly increased over time, but also it depends on whether you include DAFs that have closed. When a DAF closes, it grants out all of its assets in the last year (100% payout rate). If you included closed accounts in measuring payout rates, the average payout rate over time is about five percentage points higher than if you didn’t include those accounts (22% compared to 17%).
Next week, in the third of three blogs in this series, Heist discusses more about the findings of his groundbreaking new research on donor-advised funds. Find part 1 of the interview here.
