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3 Essential Tools For Planning An Endowment

endowment fund

An endowment fund is an investment portfolio created using financial gifts. This portfolio includes assets like cash, life insurance, company shares, and pension accounts. Endowment funds are generally held by non-profit agencies and are set up to receive donations. However, these donations are guided and assigned for specific purposes, per their donors’ wishes. Some common uses of endowment funds include funding education scholarships, research programs, and healthcare costs.

Endowment funds are permanent and meant to last into perpetuity. The organization holding the fund only spends on the revenues from invested funds. Ideally, an endowment fund is expected to provide the beneficiary organization with a steady flow of income to fund activities that produce social goods.

There are four types of endowment funds, and they include:

  • Restricted Endowments: Also known as true endowments. A restricted endowment fund is regulated by donors and must comply with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) provisions. The UPMIFA is a uniform act that guides investment decisions and the management of donated funds.
  • Unrestricted Endowments: The donors in this type don’t impose limitations on beneficiaries’ spending. Unfortunately, unrestricted endowments are rare.
  • Quasi Endowments: They’re also known as board-designated endowments. They are set up and funded by institutions to cater for day-to-day operational expenditure. They’re not governed by UPMIFA.
  • Term Endowments: Also known as temporary endowments. They are restricted by donors until the lapse of a specified duration or the occurrence of a pre-determined event. UPMIFA regulates some term endowments.

Setting up and running a successful endowment fund is a critical management activity for many non-profit organizations. Through strategic investments, these organizations earn capital gains, interest, and dividends that provide consistent income to finance their operations. A prudent plan for your endowment can make the difference between a struggling or thriving non-profit organization.

endowment fund

Below, we take a look at three tools to consider when planning an endowment:

  1. A Strategic Vision Document

Finding and pitching to potential donors is a significant contributor to your endowment’s success. A balanced strategic vision that tells a story about where you’re coming from, your current situation, and your vision for the future you desire provides donors with a document against which to gauge your intentions. A strategic plan can help demonstrate your organization’s short, medium, and long-term goals.

A strategic plan also allows potential donors to evaluate your organization’s mission and vision against your past and present projects. It also provides evidence of your current financial position. Most donors are keen about an organization’s financial health because their preferences are for donated funds to be used to improve the social welfare of communities as opposed to funding daily operations. Therefore, it would help to prove that you have adequate reserves, where the preferred ratio is three times your current operating budget.

You could also use the strategic vision document to communicate the organization’s short, medium, and long-term needs. This document can also demonstrate the preferred investment strategy for generating a consistent income. A strategic vision document can inspire donor confidence.

  1. An Endowment Fund Committee

Endowments operate under a strict regulatory framework. Selecting a highly skilled and experienced professional team to steer your endowment can boost your donors’ confidence that the fund will be managed well. Your committee can comprise experienced investment bankers, accountants, financial advisors, attorneys, social workers, and others. The establishment of this committee also enhances the chances that the funds will be well invested.

  1. Endowment Fund Regulations

With the help of your endowment fund committee, consider setting up the endowment as an independent legal entity guided by a strict set of rules and regulations. The following policies will determine critical components of your fund’s regulations:

  • Investment Policy

Your investment policy should specify the kind of investments that fund managers are authorized to make. It will also spell out your investment horizons and desirable returns from different asset classes. The investment policy will also provide a guide concerning taxation for endowments.

  • Withdrawal Policy

Your withdrawal policy should specify the amount of money your organization can take out within a specified duration. It will also show the time intervals between withdrawals. Your withdrawal policy should be guided by your organization’s requirements and total fund value.

  • Usage Policy

This will highlight the purposes for which funds can be used while ensuring nil deviation from established objectives. Your usage policy must eliminate misuse of funds and preserve the fund’s integrity.

Summing It Up

Raising funds from donors can go a long way in helping your organization realize its objectives. However, most of these funds come with strict requirements that can lessen their impact on your organization’s mission.

Partnering with independent, qualified, and experienced investment advisors with a good understanding of how endowment funds work and who are conversant with the provisions of the UPMIFA can further improve the management of your endowment funds. Their vast experience can help you structure your investments to take advantage of unique opportunities contributing to better investment income. A good return on your investment provides your organization with sufficient cash reserves to run its operations.


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