November 21, 2011; Source: New York Times | The recent New York Times op-ed by Ray Madoff of BC’s law school suggests that while President Obama and Congressional Republicans purportedly wrangle over capping the charitable tax deduction (Kabuki theater like no other), the important issue that they have overlooked are donor-advised funds that sit on charitable donations while the donors take immediate tax breaks. Lacking a foundation-like payout requirement, money in donor-advised funds “can languish in these charitable holding pens for decades or even centuries” while the institutions that hold DAFs, such as Fidelity, Vanguard, and Schwab, earn “significant management and investment fees.”

Our analysis in last year’s “The Myths and Realities of Commercial Gift Funds” suggests that the DAFs managed by the big three commercial firms spend at a much faster clip than the 5 percent spending of private foundations or even by the DAFs managed by the commercial firms’ competitors—community foundations: “Between 2003 and 2007, Fidelity’s payout was 23 percent, Calvert’s 14 percent, Schwab’s around 20 percent, and Vanguard’s 21 percent, compared with an average payout of community foundations surveyed by the Council on Foundations (COF) of 13.1 percent and a median payout of 9 percent.”

Admittedly, the payout on DAFs is based on cumulative averages of all of the accounts held by the likes of a Fidelity or a community foundation, so it is entirely possible that the high spending rate of some individual funds might mask the negligible payouts of others. For the big three commercial firms, there seem to be policies meant to goose the specific funds that are not spending much at all, but we don’t know quite how those work in practice behind the confidentiality firewalls that the firms provide for donor-advised funds, and we don’t know if similar policies exist for most of the couple of dozen other DAF managers that are much smaller than Fidelity, Schwab, and Vanguard. But to criticize DAF managers for pitching philanthropic perpetuity to donors establishing DAFs and lauding the 5 percent mandatory spending (not grantmaking!) payout of foundations—nearly all of them established for perpetuity—is off the mark. Foundations control much higher levels of assets than the cumulative assets of DAFs controlled by commercial firms, community foundations, and others, and private foundations’ payout rates are laughably small compared to their commercial DAF manager competitors’. Most foundations tightly manage their spending for perpetuity (which is a long, long time) and fight efforts to change the payout requirement—to 5 percent all-grants or something higher—as if their very existence is at risk.

Perhaps a 5 percent payout floor for all individual donor-advised funds is worth examining. But foundations as the exemplary spending model? Hardly. Perhaps Madoff could have called for better disclosure of the grantmaking beneficiaries of DAFs, something that most private foundations report reasonably well in their 990PFs. But Madoff would have done better to call for a payout floor for DAFs and a higher private foundation payout rate.—Rick Cohen