If your nonprofit is just getting started with an endowment (whether it’s a Board-designated endowment or a true, traditional endowment; see Topic #2 for more on these terms), you may have some practical questions about how to manage that endowment. This topic will give you the nuts and bolts of managing an endowment account. Most of these steps are common sense, but they are important for well-managed organizations, so you don’t want to skip them.

Know the Restrictions

Start by consulting the investment policy statement and any other Board-approved investment strategies and identifying any applicable donor restrictions (see Topic #1) related to the endowment. Confer with your organization’s legal counsel and accountant if you have questions about any of the provisions or about restricted funds that your organization may have.

Maintain Separate Accounts for Restricted Funds

While the law does not require it, most nonprofits and their professional advisors find that creating separate accounts for restricted and unrestricted endowment funds is the easiest and most compliant and straightforward way to manage funds.

Understand How to Access Your Accounts and Funds

If you are opening new accounts for your endowment funds, understand and be comfortable with the process and procedures to access both the funds themselves and all statements and documentation related to the new accounts. Consider:

• who will have access
• how access will be available
• how statements will be sent
• who your accountant can call with questions about information appearing on the account statements, and
• the process for making deposits, disbursements, and transfers

If you are investing a reserve fund for emergencies or to manage cash flow, see below for ideas for short-term investment vehicles.

Establish Asset Allocations and Make Investments

Work with your investment advisor to ensure your asset allocation strategy and investment portfolio align with your investment policy statement and the organization’s values. See Topic #6 if you need help sourcing and selecting an investment advisor whose investment philosophy and experience align with your organization’s values and will support the Board’s investing goals. Review your asset allocation and your investment portfolio periodically and make adjustments as needed.

Make Annual Spending Decisions

Every year as part of the budgeting process, the Board will discuss and decide what percentage of assets can be spent on that year’s grants, programs, and operations. This election is to establish the “income” of the organization for the year – or  what is available to spend, separate from other funding sources such as annual fundraising donations and grants. The income election – generally between 2% and 7% of the value of the organization’s assets (see Topic #5) – is an opportunity for Boards to align their annual spending with the impact they are seeking. Download our Sample Board Resolution Making an Income Election.

Document Decisions and Share Information

Timely document any changes to investment strategy, asset allocation, and annual income elections, which includes documenting the charitable purposes and terms of any impact investments. Maintain the documents in your permanent records and provide copies of all documentation, restrictions on your endowment, and Board resolutions to your bookkeeper, accountant, and legal and investment advisors. They will need this information to support your nonprofit in complying with terms, restrictions, and filing requirements.

PROGRAM RELATED INVESTMENTS AND PRIVATE FOUNDATIONS
If your nonprofit is a private foundation, it will be critical for the Board to understand the differences between a PRI and an MRI and to decide and document which they are using. Only PRIs which meet the legal requirements can qualify for the annual 5% federal pay-out requirement and are exempt from common rules governing private foundation investments as discussed in Topic #5. For more information, see our Impact Investing Board Discussion Guide, which includes an overview of PRIs and MRIs – including a summary of the Internal Revenue Code’s requirements for PRIs – and some tools for deciding when to use them.

MANAGING RESERVE FUNDS
To manage a reserve fund – which is most often held to manage cash flow or hold emergency funding – the investment vehicle should balance the need for a return with the need for quick access. Some examples of investment vehicles for reserve funds include:

• Money market funds, which are mutual funds that invest in secure and highly liquid cash and debt-based securities (such as U.S. Treasuries). Considered low-risk, low-return investments, they are often selected to hold money for shorter periods of time. In most cases, the funds can be withdrawn at any time, hence their appeal for emergencies or cash-flow management. Money market funds are sponsored by investment fund companies and regulated by the Securities Exchange Commission (SEC). Although they are low-risk, they are not no-risk, so Boards must weigh the risk of using money market funds as part of their prudent management of the nonprofit’s charitable dollars.
• Money market accounts (MMA) are a type of interest-earning account offered by banks and credit unions that often provide higher interest than what a simple savings account would offer. MMAs can function like checking accounts, allowing for check-writing and debit card transactions. MMAs, sometimes called money market deposit accounts (MMDA), are insured to a certain level for each depositor – currently $250,000 – with the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits, and the National Credit Union Administration (NCUA), which insures credit union deposits. MMAs may have a minimum balance requirement and/or a fee associated with them.
• Certificates of deposit (CD) are another type of interest-earning savings account offered by banks and credit unions. When selecting a CD, Boards agree to keep the money in the CD for a certain length of time – most often between 3 months and 5 years – in return for a specified interest rate that may be higher than what a savings account yields. If the funds are withdrawn early, the nonprofit pays a penalty. CDs are also insured by the FDIC and NCUA, and a Board that can reasonably predict cashflow needs, may be able to invest in a series of CDs of differing maturity dates to manage spending and earn interest on the funds.

CAREFUL!
Sometimes the needs of the organization or the programs it supports change, and particularly with long-term endowments, the original restrictions may not support the organization’s current work. Boards wanting to modify endowment restrictions for more flexibility should consult their legal advisors as they may need donor consent, court approval and/or the approval of the state Attorney General to make changes.