Simply put, the importance of an endowment fund for a nonprofit organization is that in a world of change, the fund provides continuity, constancy and permanence. An endowment fund is a source of lasting support, a bridge from the present to the future of the organization.
How Does an Endowment Fund Work?
It is a permanent fund – the principal is invested, and the interest provides income to support a nonprofit organization’s activities. The nonprofit may take a maximum payout of 5% annually (see the RSF Foundation’s Endowment Spending Policy for more information). The institution that holds the endowment has legal control over the funds to protect the endowment principal. When a nonprofit organization establishes the endowment, they specify the purpose of the fund, and that purpose is protected over time.
How Much Money Does it Take to Open an Endowment Fund?
An endowment provides financial sustainability for an organization to carry out its mission over the long term. The capacity to meet the current operating needs of the organization should be provided for before setting aside funds for an endowment. At the RSF Foundation, we recommend that an organization have at least six months of operating reserves before establishing an endowment fund. The endowment fund can be set up with almost any amount.
Can We Move an Endowment Fund?
The transferability of the fund varies among institutions that hold endowment funds, and primarily depends on the investment strategy of the institution. At the RSF Foundation, an organization may transfer their fund to another qualified institution if a compelling reason arises for them to do so. The RSF Foundation invests in indexed mutual funds at the Vanguard Group (find out more about the RSF Foundation investment stewardship).
How do We Promote an Endowment Fund to our Donors?
One approach to building an endowment is to recommend that donors consider a 10% endowment contribution for each dollar they give to the organization. Their contribution of $1.10 provides one dollar for current needs plus 10% invested in sustaining the organization into the future.
Donors may make endowment fund gifts to mark a special occasion or to honor a special person with a memorial gift to the endowment. Organizations may raise donor awareness to endowment giving through an endowment campaign, through frequent consistent messaging about their endowment, or by providing opportunities to endow specific aspects of their programs.