Building a Successful Nonprofit Investment Policy Statement

An updated nonprofit Investment Policy Statement (IPS) is the key to long-term investment success and endowment sustainability. Including a formal spending policy, they provide a roadmap for effective stewardship of your organization’s investments and spending, increasing the impact of your nonprofit’s mission. Through the rest of this article, I’m going to explain what goes into an IPS, how to craft one that meets both your financial goals and your charitable goals, and I’m going to provide multiple sample Investment Policy Statements that you can use as templates.

According to a 2019 survey by Exponent Philanthropy, more than a quarter of its members, which are small foundations, operate without a formal written investment policy statement (IPS).

Frankly, I was surprised that the number wasn’t even higher. In my anecdotal experience, few nonprofits have formal Investment Policy Statements and those that do rarely revisit or update them. It’s understandable, as nonprofit boards members are busy, and it feels easy to put off what should be an annual IPS review. That said, not having an updated Investment Policy Statement can put your organization at risk.

The problem with not having an IPS and spending policy is two-fold.

First, a lack of long-term planning increases the probability that your endowment will face death by a thousand cuts. I’ve seen this many times, as nonprofits treat their endowment like an emergency fund. They dip into it hesitantly at first, then more and more often, until it eventually runs out. Having an IPS and formal spending policy will spell out the organization’s ability to withdraw funds from the account. It will also usually plan for a sufficient liquidity, or withdrawals, each year. By having a set amount of withdrawals, an organization can then build that spending into their budget.

Second, having formal governance through an IPS protects both the organization and the individual board members. As organizations grow, will donors want to see formal oversight policies and governance. Just like your mission statement lays out your goals as an organization, an IPS provides the roadmap for achieving those objectives. Particularly when you begin to receive larger planned gifts, donors will want to know that their gift will be used well. An IPS is an easy way to define oversight and governance responsibilities, one that can show donors an organization will be effective stewards of their gift.

Here are the reasons your organization needs an IPS:

• Articulates and memorializes the fundamental objectives of your organization’s portfolio.
• Establishes a framework for board members and investment professionals to follow consistently.
• Provides guidelines to ensure that your organization’s investments align with both short-term and long-term goals and objectives.
• Creates guidelines for periodic review and rebalancing of the investment portfolio.
• Assists board members in fulfilling their fiduciary responsibilities, such as the “duty of care” provision of the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
• Demonstrates to donors that their contributions are being managed prudently and responsibly.

Key Components of a Non-Profit IPS

Purpose and Policy Statement

Provides a concise description of the organization, mission, investment guidelines, investment objectives, and how the portfolio will impact and support the mission. Make it short and sweet.

Investment Objectives

Describes organizational goals for the funds. Will it be used to provide annual spending or is it meant for long-term growth? Here are some potential investment objectives:

• Capital preservation
• Capital appreciation
• Income generation

Spending Needs Policy

When, for what reasons, and how much of the account can be spent in any given year.

• Outlines annual distribution strategies
• Describes when and why funds can be disbursed above regular annual spending
• Can be a fixed annual amount, a percentage of account growth, only dividends and interest, or any number of other options

Some nonprofit organizations target a very specific percentage of spending each year, others leave it up to the board to decide on an annual basis. I’ve seen both and I prefer (recommend) organizations include spending from long-term investments as a part of the budgeting process each year.

For Example: XYZ Community Fund sets their annual endowment withdrawal at 5% of the fund’s value on July 1st, taken ratably over a 12 month period beginning the following January.

This provides them with a solid, forecastable income stream that they can use when building the budget for the following year.

Based on UPMIFA, spending should almost never go above 7%, barring unique circumstances. Most organizations find that a 4-5% spending rate is sustainable and meets their organization’s goals.

Risk Tolerance

Assess the risk tolerance of the non-profit based on liquidity needs, time horizon, appetite for volatility, and ability to take risks.

I suggest splitting your risk tolerance into multiple sections, with separate risk levels for differing situations and needs.

For Example: XYZ Men’s Shelter has multiple investment accounts. One is a quasi-endowment, one is long-term reserves, and the third is short-term reserves. It doesn’t make sense to have the sense asset allocation for both an endowment and short-term reserves that need to be liquid. Instead of having multiple investment policies, they have one policy that includes provisions for multiple situations.

This is the same reason I recommend providing risk tolerance by investment goal rather than specifying actual account names or account numbers: things change and you don’t want to have to update your IPS every time an account number changes or a new account is opened.

Time Horizon

Is this portfolio meant to last indefinitely or will it be used for a specific period?

Will the portfolio be used for a specific purpose, such as capital improvements to a building or something similar?

Asset Allocation Strategy

Importance of Diversification

Diversification serves to lower portfolio risk and volatility. Different asset classes move at different times; modern portfolio theory teaches that blending a combination of asset classes provides a portfolio that has a better risk-adjusted return than the sum of its parts.

Types of Investments

• Equities
• Fixed Income
• Alternative Investments
• Cash and Short-Term Investments
• Mission Driven / Impact Investments such as low-interest loans or other investment vehicles

Ethical and Social Considerations

Incorporating ESG Criteria

Environmental, Social, and Governance…also known as Socially Responsible Investing, offers a way of screening out investments that don’t align with an organization’s mission and values.

Aligning Your Investment Program with Your Mission

Screening out potentially conflicting investments like:

• Tobacco
• Weapons / Defense
• Oil & Fossil Fuels
• Pornography
• Abortion
• Alcohol / Cannabis
• Gambling

Sample Asset Allocation Models for Your Investment Program

• Conservative –45% Equities to 55% Bonds
• Balanced – 50% Equities to 50% Bonds
• Aggressive – 85% Equities to 15% Bonds

Developing a Rebalancing Policy

Triggers for Rebalancing

Deviation from target allocation – Rebalancing is triggered when an investment or asset class moves beyond a threshold, i.e. Nvidia is supposed to be 2% of the portfolio, but due to strong growth, it’s now 10% of the portfolio. Such an imbalance should trigger a rebalance. Rebalancing can be triggered by changes in financial markets, on a quarterly basis, or through a combination of triggers.

Time – Rebalancing is done on a regular basis, typically quarterly, semiannually, or annually. In this type of rebalancing, investments are rebalanced to the initial target at each rebalance.

Performance Monitoring and Review

Setting Benchmarks

Without accurate benchmarking, an organization won’t know if they’re on the right track or not. Setting the right benchmarks provides an accurate yardstick to ensure that your investment returns match your organization’s objectives. Likewise, setting the right benchmarks helps with risk management.

Too often I see incorrect benchmarks, which provide boards with an inaccurate view of past performance. Risk adjusted returns are incredibly important. As an organization you want to make sure that you’re comparing your return objectives to stated objectives that align with your liquidity requirements, spending rate, risk tolerance, investment style, and any investment restrictions in-place.

Appropriate Portfolio Benchmarks:

A blended Benchmark of 70% Russell 1000 Index and 30% US Aggregate Bond Index

Inappropriate Benchmarks:

The S&P 500 Index

Your portfolio is unlikely to be invested in all equities, thus it’s inappropriate to benchmark your returns to an all-equity index. Your benchmark should match the risk of your portfolio via its asset allocation.

The simplest method benchmarking method is to look at your overall allocation of stocks, bonds, and cash, then use corresponding indices to build your benchmark.

For example: XYZ Private Family Foundation has an allocation of 70% stocks, 28% bonds, and 2% cash.

An appropriate benchmark would be 70% Total Stock Market Index, 28% Aggregate Bond Index, and 2% Cash.

An inappropriate benchmark would be 100% Nasdaq.

The Nasdaq would likely have better returns, but also significantly more potential risks. You want to compare your returns with an example benchmark that has similar risk and objectives.

Frequency of performance reviews

How often will the Investment Committee review the investment advisor and potentially put out Request for Proposals from other advisors?

Once a year is probably too often. Instead, every two to three years is typical. An RFP is a good way to show proper governance and ensure that fees are reasonable based on the market.

Adjusting Your Investment Policy

The IPS should be flexible enough to not need updating based on economic or market projections. These decisions should likely be delegated to the nonprofit’s investment advisor, to be made using guidelines from the IPS.

The IPS should be adjusted if the organization’s goals change or if there is a necessary change in spending policy.

Roles and Responsibilities Including Delegation

Board of Directors

• Strategic governance and oversight of the investment committee
• Typically has final approval of non-profit Investment Policy Statements and spending policies

Investment Committee

• Ongoing oversight over investment managers
• Monitoring asset allocation versus allocation specified above
• Implementation and monitoring

External Investment Managers / Advisors

Most nonprofits define their investment goals via their IPS and then delegate the actual investment decisions to investment advisors. This is often the best practice, as most nonprofits don’t have the capacity to manage investments on a daily basis. It’s typically more effective for them to focus on their mission as opposed to investing.

Criteria for Investment Manager Selection

Investment Manager Experience

Do they work with other nonprofits? Are they a regular advisor who happens to know a board member? I should mention that investment manager and investment advisor or financial advisor are synonymous, at least within this document. I’ll use both interchangably.

Too often, I see advisors who manage funds for a single nonprofit. They miss that nonprofits have very different circumstances than individuals. So when they invest the charity’s funds in the same way they invest for an individual, there’s a mismatch. They don’t understand the nuances that stem from organizational cash flow and liquidity needs.

Education

Do potential investment managers have the education and knowledge necessary to invest your funds in an evidence-based manner?

I’m currently the treasurer for a nonprofit and here are the criteria I considered when evaluating investment managers for our organization:

• Bachelors or Masters in Finance, Economics, or a related field
• Rigorous certifications such as the Chartered Financial Analyst, Certified Financial Planner designation, or Chartered Alternative Investment Advisor
• Nonprofit-focused education such as a a graduate certificate in Philanthropic Studies from the Lilly Family School of Philanthropy at Indiana University or the Chartered Advisor in Philanthropy designation from the American College of Financial Services.

Services

Will they only provide investment management? This is typically the extent of services provided by regular, nonprofit focused advisors.

That said, some firms offer nonprofit-specific services beyond just managing your endowment or foundation assets. (Plentiful Wealth is one of them, working with nonprofits is our focus. You can see our nonprofit-focused services here.)

Here are some potential services to ask about:

• Are they willing or able to help with planned giving or other fundraising activities?
• Will they accept gifts of stock on your behalf and help with documentation letters?
• Can they manage your cash reserves as well as your investments?
• Do they provide guidance to your board on governance?
• Is board education provided?

If you’re able to find an advisor able to act as both an outsourced Chief Investment Officer and work with development staff on fundraising, it can be a truly valuable combination.

Investment Strategy

When I sit down with nonprofit organizations , I always stress the importance of evidence-based investment strategy. Nonprofits don’t have the luxury of chasing fads or gambling with donor dollars. Their job is to steward resources carefully, so the mission can be sustained for generations. That’s why I often recommend investment portfolio strategies grounded in academic research and real-world data, not the latest headline or glossy fund pitch.

In most cases, that means leaning into an asset allocation using passive, low-cost funds. Broadly diversified index funds have a strong track record of delivering market returns with minimal fees, and every dollar saved on fees is another dollar that can go toward advancing the mission of nonprofit organizations. Passive strategies also reduce the temptation for boards to time markets or pick “hot” managers—two decisions that research consistently shows add risk without reliably improving results. Simplicity, transparency, and cost-control are advantages that fit perfectly with a nonprofit’s fiduciary duty.

That said, I don’t want to give the impression that passive investing is the only tool worth using. For organizations with sufficient scale—typically above five million in investable assets—select alternative investments like private equity, real estate, or hedge funds can play a valuable role. These investments often bring illiquidity, but in exchange they can provide diversification, inflation protection, or enhanced investment performance. A well-structured asset allocation framework can make room for these opportunities while still protecting day-to-day spending needs. Alternatives are typically illiquid investments, so the key is making sure the portfolio size and cash-flow requirements are strong enough to handle the longer lock-up periods without putting the mission at risk.

In other words, evidence-based investing doesn’t mean rigid investing. It means using the best tools available for the job—prioritizing cost-effective, diversified strategies as the foundation of your target asset allocation, while thoughtfully layering in alternatives where they truly add value. Done well, this approach creates the kind of steady, disciplined portfolio that allows nonprofit leaders to focus less on market swings and more on their mission.

Fees

Fees matter, both advisor fees and internal investment expenses. Every dollar going to the advisor is a dollar that can’t be spent furthering the mission.

Before hiring an advisor, make sure you understand all fees you’ll be paying. Often you’ll be quoted a fee for direct management, however internal expenses won’t be mentioned. As a steward of your organization’s assets, you need to look at the all-in fee, which includes the advisor’s management fee, fund fees, and any custody or miscellaneous other fees that might not be disclosed up front.

Likewise, you should run away from any advisor that recommends investments with a commission.

Investment management should be relatively inexpensive, compared to typical financial planning and investment services. The services required are different than traditional wealth management, so the pricing shouldn’t be benchmarked to what a typical wealth management client would pay.

If you want to see the potential impact of higher fees on your investments, check out our calculator, which shows the real cost of high fees on your endowment.

Fees should be benchmarked through the RFP process. Investment advisors should be under .75%, on the high end of the scale, but lower than that is better. (Our highest fee is .35% annually)

Fiduciary duty from the advisor is a necessity

Potential conflicts of interest should be examined. Some conflicts are unavoidable, while others are red flags. Your organization’s Conflict of Interest Policy should provide guidance on how to deal with any potential conflicts.

Sample Non-Profit Investment Policy Statement Downloads and Resources

Here are three Investment Policy Statement templates that you can use as references when creating a sample Investment Policy Statement for your non-profit.