11 Trends in Philanthropy for 2019: Anticipate and Embrace What's Next

“Giving in the United States has now topped $400 billion. Countless community and national organizations are benefiting from a surge in public interest and a growing conviction that renewing our democracy will require that we work together. The entire ecosystem of philanthropy — nonprofits, foundations, donors, and volunteers — is rallying to the cause of civil society and cross-sector collaboration.” Click here to keep reading.

Source: Johnson Center

Appellate Court Revives UPenn 403(b) Lawsuit

“The 3rd U.S. Circuit Court of Appeals has revive a lawsuit against fiduciaries of the University of Pennsylvania’s 403(b) plan which had been fully dismissed by a District Court in 2017.

The appellate court agreed with the dismissal of most claims, but when it came to claims about excessive fees and improper investments, the court found the plaintiff plausibly alleged a breach of fiduciary duty under the Employee Retirement Income Savings Act (ERISA). It said the plaintiff’s factual allegations are not merely “unadorned, the-defendant-unlawfully-harmed-me accusations, but are numerous and specific factual allegations that the university did not perform its fiduciary duties with the level of care, skill, prudence, and diligence to which plan participants are statutorily entitled under ERISA Section 1104(a)(1).” Click here to keep reading.


Social Security is About to Pay Out More Than it Takes In -- for the first time in decades

“By 2020, obligations to retirees and disabled Americans will cost more than Social Security’s revenue from payroll taxes, taxes on benefits, and interest earned on investments.

That imbalance is expected to continue until the SSA’s main trust fund—the Old-Age and Survivors Insurance fund—is depleted in 2034, at which time scheduled benefits would be cut 23 percent to retirees. This year’s projection is inline with last year’s Trustees Report.” Click here to keep reading.

Source: BenefitsPro

Boosting Effectiveness of Retirement Plan Communications

“Words have the potential to inform, encourage and empower. But the wrong words can be powerful in negative ways, leaving people uncomfortable, overwhelmed or confused. Using the right words is especially critical in financial matters. Employees need to understand their retirement plan options so they can make the best decisions for their future, but the general public often misunderstands words that are commonly used by financial providers, employers and others in the retirement planning industry.” Click here to keep reading.


Nonprofit Spending in a Low Return Environment: 4 Potential Strategies and Solutions

Nonprofit Spending in a Low Return Environment: 4 Potential Strategies and Solutions

By: Sloan Smith, vice president, CAIA

For a majority of nonprofit organizations, establishing an adequate spending policy for their portfolios is an important decision. This policy plays a key role in designing the long-term expected rate of return of the portfolio and its strategic asset allocation. The IRS has required that private foundations spend 5% from the portfolios each year in order to keep their tax-exempt status. The 5% spending rule, along with the smoothing method of averaging the value of assets over multiple points in time, have been used as key guidelines for nonprofits and their spending policies. However, with equity valuations at historically high levels, coupled with diminishing yields from fixed income investments, many wonder if a 5% spending policy is suitable going forward. Many nonprofits are facing difficult decisions to avoid the depletion of their portfolios and long-term purchasing power.

In the last several decades nonprofit institutions had few significant challenges attaining a 5% or greater real return, which is the nominal rate of return minus inflation.  Due to the relatively strong performance of the markets, a 5% real return could be achieved through a diversified portfolio comprised of stocks and bonds. However, with interest rates near multi-decade historical lows, the yield on the fixed income portion of a portfolio has contributed less and less toward a 5% real return.  Therefore, it is important that nonprofit organizations review their spending policies, long-term expected return targets, and strategic allocations to determine if their current spending policy makes sense. If an institution wishes to maintain the purchasing power of the portfolio and make ongoing portfolio distributions, then four choices need to be considered:

  1. Increase the risk in the portfolio in order to generate higher returns

    By allocating more toward riskier assets, a nonprofit could potentially increase the portfolio’s long-term expected return. - This decision would likely force the portfolio to have more exposure to equities and less to fixed income. Even though adding more equities can enhance the expected return, the portfolio would experience a greater volatility, steeper drawdowns, and potentially increased year-to-year fluctuations in the dollar amounts distributed from the portfolio. While the option of increasing the portfolio’s risk/reward profile is straightforward, periods of poor returns are likely to test an organization’s patience and resolve to maintain the course of action.


  2. Add more illiquid allocations to the portfolio

    Enhancing portfolio returns while potentially reducing total portfolio risk could come from incorporating more alternative and illiquid asset classes, such as hedge funds, private equity, direct real estate, reinsurance, and illiquid credit. The total allocation to illiquid investments needs to be carefully assessed, as such commitments may have little to no ability to contribute cash flow to the portfolio’s distributions.  In order to meet the 5% spending policy, cash may need to come primarily from equities and fixed income, which could make it more challenging to rebalance the portfolio’s asset allocation in a timely manner.


  3. Reassess and potentially reduce the spending policy

    This option may seem challenging at first, considering the nonprofit’s donors may have contributed with the expectation that the portfolio would make perpetual distributions at a certain percentage of the portfolio’s value.  However, the portfolio’s distributions may not keep up with inflation if the distribution percentage rate is too high.  Research has shown that a lower spending policy may be a strong solution going forward.  For example, decreasing the annual spending from 5% to 4%, and assuming a total return of close to 6%, after 42 years the portfolio would distribute more in dollars, as compared to portfolio with a 5% spending rate.[1] By reducing the spending rate, more assets would be left in the portfolio to grow every year, leading to a larger long-term portfolio values and eventually higher payouts.


  4. Add more capital to the portfolio through fundraising

    The significant appreciation in risk assets since the 2008-2009 bear market has provided an opportunity for nonprofits to enhance their fundraising efforts.  It is a great time to improve development, marketing, and communication programs to strengthen relationships with all donors, thereby leading to increased contributions. Successful fundraising increases the ability of the portfolio to maintain the spending power of its distributions.


    There is no single right approach for nonprofit organizations to address their spending dilemma.  Some nonprofit entities may be willing to adopt a higher risk change certain aspects of their portfolio.  However, there may be others who cannot due to the restrictive nature of their spending policies and their heavy reliance on portfolio payouts to support their organizations.  In the end, lower expected returns would make it difficult for nonprofits to satisfy their spending policy, especially if it is 5% or higher. Therefore, it is important that nonprofit organizations and their investment committees review these choices and determine which solutions may be best. Prudent long-term planning can have significant and lasting benefits to organizations and the causes they support. 

About Innovest

For more than 20 years, Innovest has provided excellent client service as well as forward-looking, innovative investment solutions for endowments and foundations, retirement plans, and families. We are an independent provider of investment-related consulting services and work on a fee-only basis.

Chart 1: Average Annual Effective Spending Rates for Fiscal Year 2014 and 2015 [2]

Chart from Nonprofit spending in low return environments.png

[1] https://www.plantemoran.com/explore-our-thinking/insight/2016/09/nfp-spending-policy-paper

[2] 2015 NACUBO-Commonfund Study

Source: Innovest

Curve Ball: Is the Yield Curve Signaling the End of the Expansion and the Bull Market?

For nearly 10 years the U.S. economy has been in a prolonged period of growth without a recession. Among the 12 economic expansions since World War II, the current one, which started in mid-year 2009, is the second-longest in duration at 117 months (as of March 2019). Only the economic expansion in the 1990s was longer. At this stage, it would be reasonable for investors to ask: "Is the U.S. overdue for a recession and a bear market?" Click here to keep reading.

Source: Innovest

Lawmakers Ask GAO to Examine Cybersecurity of Retirement System

ERISA, the Employee Retirement Income Security Act, governs the electronic disclosure of retirement plan communications and requires that plan fiduciaries take the necessary steps to protect plan participant’s confidential personal information. Now the U.S. Government Accountability Office has been asked examine the cybersecurity of the retirement system. Click here to read more.

Source: PlanSponsor