An endowment can be a powerful financial tool for a nonprofit organization, but only if it’s managed with care, strategy, and transparency. Whether you’re starting a new fund or reassessing an existing one, understanding the fundamentals of endowment oversight is key to long-term sustainability and donor trust. Here are some key considerations.

What is an Endowment Fund?

Endowments are funds established by organizations (such as nonprofits, universities, or foundation) to provide long-term financial support. These funds are typically invested to generate income, which is then used for specific purposes as dictated by the endowment’s terms. The principal (original amount) is usually preserved, while the income supports scholarships, programs, operations, or other mission-aligned activities.

Tracking and Monitoring Endowment Funds

Proper oversight ensures that endowment funds are used effectively, remain compliant, and support long-term goals. Here’s how to do it:

1. Establish a Clear Spending Policy

• Define how much of the endowment’s income can be used annually, commonly 3% to 5% of the fund’s average market value, calculated over a multi-year period. This approach helps smooth out market volatility and ensures more predictable annual distributions.
• Avoid overspending, which can erode the fund’s long-term viability.
• Consider inflation and market volatility when setting the policy.

2. Invest the Endowment Prudently

• Use a diversified investment strategy (e.g., equities, fixed income, alternatives) to balance risk and return.
• Follow a formal Investment Policy Statement (IPS) that outlines asset allocation, risk tolerance, and performance benchmarks.
• Rebalance the portfolio periodically to maintain alignment with the IPS.

3. Monitor Principal and Investment Return

• Track both the principal and investment returns (interest, dividends, capital gains/losses).
• Maintain separate records for donor-restricted and board-designated funds to ensure compliance.

4. Maintain Detailed Records and Reporting

• Use specialized accounting software to track fund balances, earnings, and expenditures.
• Generate regular endowment statements showing fund performance, income, and disbursements.
• Ensure reports are accessible to finance teams, auditors, and board members.

5. Track Donor Restrictions

• Document all donor-imposed restrictions (e.g., for scholarships, research, or specific programs).
• Ensure spending and investment decisions align with these restrictions to avoid reputational and legal risks.

6. Regularly Review Fund Performance and Strategy

• Conduct quarterly reviews of investment performance and spending.
• Adjust asset allocations or spending policies as needed based on market conditions and organizational needs.
• Engage the board or investment committee in strategic oversight.

7. Ensure Compliance and Transparency

• Stay compliant with legal and tax regulations (e.g., IRS rules for nonprofits).
• Provide transparent reporting to donors, auditors, and the public.
• Conduct periodic audits and legal reviews to ensure best practices.

FAQs: Tracking Endowment Funds

1. What are the different types of endowments?

• Permanent Endowment: Principal is preserved forever; only earnings are spent.
• Term Endowment: Principal can be spent after a set period or event.
• Quasi-Endowment: Created by the board; principal may be spent at the board’s discretion.

2. Can we spend the principal in an emergency?
Generally no, especially for donor-restricted or permanent endowments. Spending the principal may violate legal agreements unless it's a board-designated (quasi) endowment.

3. What happens if our nonprofit closes?
If the nonprofit dissolves, the endowment is typically redirected to a similar organization, as outlined in the fund agreement. Many community foundations retain variance power to reassign funds

4. What are the risks of mismanaging an endowment?
Violating donor restrictions or overspending can damage donor trust, jeopardize tax-exempt status, and lead to legal consequences.