Opinion

Donor-advised funds and the myth of an independent sector

Sep 11, 2023

We see the tripartite—dependent—relationship between government, commercial interests, and nonprofits in the rise of institutional DAFs.

America’s professional philanthropic class often declares that democracy is reliant on independent philanthropy when it pleads for tax and other special privileges for itself and its patrons. 

Private philanthropy, the argument goes, supports civil society—which acts independently as a prudent restraint on government power and private-sector greed. Civil society prevents naked self-interest and a tyranny of the majority from running amok and destroying the common good. 

“Historically the role of private philanthropy in civil society,” a collection of philanthropic elites recently proclaimed, “has been premised on the notion that truly independent financial capital dedicated to the public good is critical to national progress.” They write that this“tradition is woven into the tapestry of U.S. democracy, which alongside government and business encompasses a large and diverse civil society.”

Is this true? Does America have a tradition of private philanthropy—“truly independent private capital dedicated to the public good”—that acts independently of government and private interests, holding both in check and thereby bolstering American democracy?

Americans, like human beings everywhere, engage in multitudinous acts of charity and kindness, noticed and unnoticed. Our question is not about human generosity, benevolence, or cooperation. Americans were generous before the charitable tax exemption, and they will remain generous and help each other regardless of changes in the federal tax code. The federal government did not create generosity through legislation. 

The relationship of private philanthropy to democracy is strictly about America’s regime of tax-incentivized charitable giving, not individual generosity. Is American democracy—as the professional philanthropic class proclaims—dependent on independent, private philanthropy for its well-being?

Private philanthropy’s origin story

Through a series of legislative acts throughout the 20th Century, the federal government acting in partnership with wealthy citizens breathed life into the public benefit corporation. Government created, in other words, what we know today as the philanthropic marketplace. 

The private foundation came into law as a means for Carnegie, Ford, Rockefeller, and others to skirt federal income tax and to retain control of their fortunes, albeit for philanthropic purposes. The public and private parties struck, it is recorded, a “grand bargain” in which private fortunes would be put toward a public purpose. 

From its inception, then, private philanthropy turned on an accommodating relationship between wealthy individuals, government, and private enterprise. Indeed, it was so accommodating that the federal government bestowed upon wealthy Americans that which nature denies every other living thing: perpetuity. 

The state’s creation of everlasting charitable trusts should be a bold clue that private philanthropy’s origin story was never about democracy or civil society or restraining government, corporate, or individual power. Indeed, it concentrated them. 

State-granted perpetuity coupled with a minimal payout requirement—5% annually—is one reason why assets in private foundations grew at the unnatural rate of 693% during the 30-year stretch from 1990 to 2020, from $145 billion to $1.2 trillion. 

This concentration of assets may have a public purpose, but it’s dwarfed by the private benefit that inures to financial managers, government regulators, and the wealthy philanthropists who control the assets. 

Private philanthropy’s enabling legislation from inception has always been about retaining and expanding power, even beyond the grave. There’s nothing, in other words, independent about the beginnings of modern private philanthropy. 

The rise of institutional donor-advised funds 

Today, we see this tripartite—dependent—relationship between government, commercial interests, and nonprofits in the rise of institutional donor-advised funds (DAFs). Institutional DAFs—like Vanguard Charitable, Fidelity Charitable, Schwab Charitable, or the Goldman Sachs Philanthropy Fund—exist as the result of federal enabling legislation that allows nonprofit charitable organizations to manage private charitable accounts on behalf of their donors.

DAFs didn’t originate from some mysterious expression of philanthropic freedom. The federal government enabled the creation of DAFs as an element of tax-incentivized charitable law.

Few people paid any attention to DAFs when they lived primarily in lowly community foundations. That all changed in the 1990s when global finance discovered that administering DAF accounts could yield big-time investment and management fees. 

Big Finance got busy creating charitable institutions in their likeness. Fidelity Investments established Fidelity Charitable in 1991. Naturally, Fidelity Investments would manage all the newly minted Fidelity Charitable gift accounts. If a wealthy Fidelity Investments client opened a Fidelity Charitable DAF, management and investment fees would compound simply by upselling an existing client on a new suite of charitable services. 

From 2017 to 2021, charitable assets in DAFs swelled by 40% to $234 billion and more than 1.3 million account holders. In fact, more than half of America’s top 20 public charities are donor-advised funds. Fidelity Charitable receives more tax-incentivized charitable revenue annually than any other charity in America. 

While all contributions to DAFs must be used for charitable purposes, year after year, most DAF funds are not distributed. They sit and swell in DAF investment accounts, earning Vanguard, Fidelity, and Schwab—and many others—millions of dollars in investment and management fees. DAFs are big business.

A portion of DAF fees, of course, go to lobbying Congress to ensure that the rules governing this government-created marketplace are fixed in a way that continues to inure to the benefit of the big financial investment firms. Vanguard Charitable alone spends hundreds of thousands of dollars annually lobbying the House and Senate on DAF regulations.

And so do nonprofit special-interest groups. Indeed, nonprofit special interest organizations are often the most-vocal groups defending preferential DAF legislation because of their conflicted relationship with the financial-services industry. 

The proliferation of institutional DAFs cemented a mechanism whereby nonprofits, because they are grantseeking organizations financially dependent on DAF contributions, promote and defend the legislative prerogatives of Big Finance. This is one significant reason why any attempts to reform DAFs have gone nowhere. Private finance and nonprofits work arm in arm to defeat public-interest legislative reform of DAFs.

There is zero evidence that DAFs have increased the total number of donors in America or the total amount of giving, even as DAF accounts proliferate. Like most financial instruments, institutional DAFs primarily function as a mechanism for earning fees off moving money and its derivatives around without contributing any real value. DAFs differ from mortgage-backed securities by degree, not kind. Their growth coincides with the financialization of nearly every aspect of American enterprise. 

Those who claim that institutional DAFs are a blessing that have democratized philanthropy, recall a time prior to 2008 when apologists for Big Finance claimed that no-document subprime mortgages democratized the American housing market. 

There’s nothing independent about “private philanthropy.” Like private charitable foundations, DAFs exploit and fuel—they don’t restrain—government power and private-sector greed. And since there’s no evidence that they have increased the total philanthropic marketplace, it’s not clear that nonprofits themselves benefit from their proliferation. 

In fact, since DAFs warehouse charitable gifts that otherwise would go to operating charities, nonprofits are the unambiguous losers in the financialization of charitable giving. There appears to be only limited public benefit to DAFs. 

Strategic philanthropy’s public-private partnerships

It would be a mistake to think that Big Finance is the only institution muddying the vitality or independence of America’s nonprofit sector. Private philanthropy works overtime to collapse any distinction between the state, private enterprise, and civil society. Leveraging foundation grantmaking in partnership with government and for-profit business is the quintessence of strategic philanthropy. 

As the mission statement of The Independent Sector—a tax-exempt philanthropic trade organization with $35 million in annual revenue—reads: “We lead and catalyze the charitable community, partnering with government, business, and individuals to advance the common good.”

In other words, public-private philanthropic partnerships are the means for engineering large-scale social and policy change, whether it’s school choice, social justice, or public-health initiatives. As Ford Foundation president Darren Walker pleads in discussing his organization’s $2 million pledge to the New Orleans Business Alliance: “We need business leaders to continue investing their time and resources into public-private partnerships …. And we need consistent public-sector support for partnerships that help companies prioritize equitable outcomes, regardless of election results.”

Setting aside Walker’s disregard for the outcome of elections—or democracy—making common cause with the state and with corporations that merge profit-making with social purpose nullifies any pretense of nonprofit or civil-society independence. 

That 80% of all nonprofit revenue comes from government funding and earned revenue further erodes the notion that the nonprofit sector is independent or that private philanthropy is essential to its vitality. Far from being an independent agent of civil society, America’s nonprofit sector functions as a subsidiary of government and, more and more, the virtue-cleansing handmaiden of Big Business.

The idea of an independent nonprofit sector in America is a myth perpetuated by the self-serving professional philanthropic class and its wealthy patrons. Beneath the myth resides the reality of a sector dependent on government regulation and the largess of private, tax-advantaged charitable giving. And it is dependent on most Americans remaining ignorant of the conflict of interest rooted in tax-incentivized charitable giving. 

This is not to say that an independent civil society does not exist in America. It does. It’s simply not part of the state-regulated, -funded, and -subsidized nonprofit sector. It’s not a part of Big Philanthropy. And it’s not dependent on America’s fictional tradition of independent private philanthropy. 

What is emerging in America is a two-tiered system of charitable giving: a state-sanctioned, tax-incentivized charitable giving regime that serves elites and the institutions they control, and a popular system outside of state control that serves non-elite Americans. While the former grows by legislative and monied fiat, the latter is born of need and compassion. One is the antithesis of civil society, the other its guarantor.

1 comment

  1. My dear friends, don’t let public opinion influence how you live out our glorious, Christ-originated faith. If a man enters your church wearing an expensive suit, and a street person wearing rags comes in right after him, and you say to the man in the suit, “Sit here, sir; this is the best seat in the house!” and either ignore the street person or say, “Better sit here in the back row,” haven’t you segregated God’s children and proved that you are judges who can’t be trusted?

    Listen, dear friends. Isn’t it clear by now that God operates quite differently? He chose the world’s down-and-out as the kingdom’s first citizens, with full rights and privileges. This kingdom is promised to anyone who loves God. And here you are abusing these same citizens! Isn’t it the high and mighty who exploit you, who use the courts to rob you blind? Aren’t they the ones who scorn the new name—“Christian”—used in your baptisms?“ James 2:1-7

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