Community foundations have one thing in common: When it comes to administrative fee structures, no two are alike. While there is not one right answer, it is important to review and compare your foundation’s fee structure to other foundations of comparable size. Many community foundations are doing just that to streamline their own fee calculation and collection processes. In this edition, we have provided the tools and statistics you’ll need to get started.
The differences among most community foundations are in how fees are assessed and calculated. Some foundations design their fee structures based on the type of funds or services they offer. For example, a fee structure might be organized by any or all of the following:
- Fund type: Is it donor-advised, designated, field-of-interest, and/or unrestricted?
- Fund longevity: Is the fund temporary or is it an endowment?
- Stratified services: Is there a tiered level of service with various fees per level?
- À la carte: The community foundation may offer special services and assess donors on a fee-per-service basis (for example, if the donor wants to fundraise for the event).
Most community foundations charge donors a percentage of the fund size for administering the fund, which is calculated using basis points. In addition to that percentage, some foundations charge minimum fees and/or transaction costs.
To determine the appropriate percentage on permanent funds, community foundations can refer to their spending policies and the payout allowed for each fund. For example, if a foundation’s payout is 5.5 percent per fund, it might allocate 4.5 percent to grants and 1 percent to administrative fees.
Other funds may not be subject to a spending policy. In these cases, a community foundation can determine the fee by the level of support the fund requires. The foundation may also charge a separate investment fee for the fund (0.25 percent to 1 percent), which covers a mix of managed accounts, fixed income and equities, custodian, and/or consultant fees.
Community foundations can also calculate fees at different times—monthly, quarterly, or annually. However, keep in mind that calculating fees consumes more staff time. In lieu of staff periodically calculating fees, you can calculate the fees for some funds according to activity. For example:
- fees assessed on the front end of the fund (when the fund is established)
- fees assessed by transaction—at contributions and/or distributions
- fees for pass-through funds
The method of calculating also varies and can be based on any of the following:
- average daily balance (calculated weekly or monthly)
- current market value at the beginning or end of the month or quarter
- labor and overhead costs for separate services (for example, you charge fees when your foundation renders special services)
Most foundations calculate payout on a rolling quarterly average and administrative fees monthly based on the average daily balance. Foundations may or may not collect fees monthly (for example, some collect quarterly).
How do you decide the best model for you? The best way is to look at what other community foundations of similar sizes are doing and then discuss and weigh your options.
There are no recommended guidelines, but you do need to consider varying factors when establishing an administrative fee pricing structure:
- What is the best way to determine our administrative fee methodology and rates?
- What administrative fees do our competitors charge for similar services?
- How often should we revisit our administrative fees policy?
- What costs are associated with taking on additional revenue-driven work?
- What is our existing capacity? Would it be more cost effective to hire additional in-house staff or outsource some processes?
- Is interdepartmental coordination needed to set a reasonable policy on fees? (Often the finance and development departments set fees together.)
Trends on Administrative Fees
In 2001, two community foundation colleagues conducted a survey on administrative fees, issues, and trends (see the Resources section for more information). The colleagues sent the survey to community foundations, and 104 financial officers responded. The responses were segmented based on the size of the community foundations’ assets as follows:
- 15 percent in the $0–$25 million range
- 45 percent in the $25–$100 million range
- 25 percent in the $100–$500 million range
- 10 percent in the $500 million and above range
The colleagues presented the survey results at the 2001 Fall Conference for Community Foundations. Below are some survey highlights. Review this information and compare it with your community foundation’s current practices.
- Most community foundations surveyed (75 percent) based their fees on fund type. Smaller community foundations were less likely to use a different fee per type of fund.
- Almost half of those who responded used a tiered fee structure, charging a different fee for each tier. A tiered structure refers to price-break points (1 percent on the first $1 million, 0.75 percent on the next $1.5 million).
- Seventy-five percent of respondents kept their investment fees separate from their administrative fees. Those who assessed an all-inclusive fee, which included investment management costs, found that it affected their operating budget because the investment management fees were then paid from the operations budget.
- Most community foundations (59 percent) used a different fee for endowed funds than for nonendowed funds.
- For endowed funds, more community foundations assessed administrative fees quarterly (60 percent) as opposed to annually (15 percent), monthly (20 percent), or other timeframes (5 percent).
- For nonendowed funds, most community foundations assessed administrative fees quarterly (45 percent), followed by monthly (25 percent), annually (15 percent), or some other method (15 percent).
- Of those surveyed, 21 percent charged fees on deferred gifts: Most assess an ongoing fee (92 percent) while some charged a fee when the deferred gift was created (36 percent).
- Seventy-five percent of community foundations kept the interest earned on the account balance of funds segregated for payout.
- Community foundations do not often offer consolidated fees for donors with multiple funds—only 14 percent of foundations did so.
Frequently Asked Questions
What factors should we consider when determining our administrative fee structure?
Administrative fees can be established by examining your local market conditions, competitive forces, and the cost of doing business. Ask yourself:
- Who are our competitors? What do they charge for products and services?
- How can we communicate the value added for our administrative fees? (Contact the Council on Foundations for samples of what other foundations charge for administrative fees.)
- How much does it cost us to provide these services (including fixed and variable costs, such as labor, overhead, facilities, marketing, and development)?
When determining a fair and equitable fee structure, you should study the complexity of specific fund types and the support they require. Keep in mind that administering fees can consume a significant amount of staff time. As one community foundation colleague said, “Sometimes foundations make deals (exception pricing) to bring the dollars through the door, but they’ve got to be sure they have the in-house ability to administer them.” If you don’t have the staff capacity, consider keeping your fee structure simple.
How do community foundations charge based on fund activity?
According to the 2001 survey, only 9 percent of community foundations charged administrative fees based on activity (that is, by transaction). For example, a community foundation might charge based on the number of grants or number of contributions.
Eighteen percent of community foundations charged for enhanced services, such as:
- offering unique investment management options
- developing a Request For Proposal (RFP) for a fund
- administering an S-Corp
- managing committees
- administering scholarships
- assisting with fundraising or technology
- researching or evaluating grants
Enhanced services, while expensive, are an opportunity to earn additional revenue for service. When offering enhanced services, community foundations often charged donors based on the actual time they spent on each activity.
According to a 2006 Foundation Strategy Group study of community foundations, some services are more costly than others. For example, the average annual cost to community foundations for scholarships was almost $20 per $1,000 in assets—the most costly of any fund type.
To “break even,” how much should we charge on our funds?
Many community foundations maintain a traditional fee ceiling of 1 percent. Below are some factors to consider when determining what fee you’ll need to charge to cover your costs:
- Degree of customization allowed or encouraged by the foundation. Unique processes in response to one-time donor requests add significant costs to all funds and divert staff attention from activities that serve a broader base of donors.
- Average fund size in each product category. In some foundations, the fees from exceptionally large funds may subsidize many small funds.
- Level of transactions associated with funds in each product area. Higher levels of gift and grant activity can lead to additional costs unless processes are streamlined, automated, or standardized.
- Degree of enhanced services provided by the foundation. Managing committee processes, creating special RFPs for certain funds, or offering unique investment management options are all enhanced services. While foundations can use enhanced services to earn additional revenue, few foundations generate revenue from these services in a systematic way.
- Pricing and discounts from published pricing. Higher effective fees, particularly for large funds at or above 1 percent of assets, are often necessary to earn enough revenue to cover costs.
Do most community foundations charge minimum fees on funds?
Community foundations charge minimum fees to avoid losing money on smaller funds. Some foundations charge minimums only on donor-advised, nonendowed funds or other funds from which the donor may spend money on a quick turnaround. Rather than establishing a minimum fund size, some opt to charge a minimum administrative fee per fund.
In the 2001 survey, fewer than half of survey respondents (46 out of 104) charged a minimum fund fee. Minimum fees ranged from $100 to $700, the most common being between $100 and $250.
Should we charge additional fees for pass-through or spend-down funds?
A pass-through fund is a nonpermanent fund established by a donor, an agency, or an organized fundraising group. It is a short-term fund that often involves a fundraising campaign or event. Such events generate numerous gifts.
A spend-down fund is also a temporary fund, established with the intent of spending it within a certain timeframe. Spend-down funds can be a valuable service to the community; yet, these types of funds may demand the same, if not more, time and effort to administer as permanent funds. Therefore, some community foundations assess pass-through and spend-down funds with a higher fee structure (such as 3 or 5 percent), a minimum fee (such as $500), or a transaction-based price.
To determine the appropriate fees for such funds, examine how much support your foundation must give to administer the funds and conduct a cost-benefit analysis.
How should we charge fees for administering supporting organizations?
The purpose and activity of supporting organizations can vary greatly, making it difficult to set one fee across the board. Some community foundations incur greater costs than they receive in fees. For this reason, they offset costs by charging higher fees than other funds, such as:
- market value plus activity fee
- market value plus minimum fee
- a customized fee schedule based on the service required
Almost half of the community foundations surveyed in the 2001 study charged fees to supporting organizations based on market value. Those that did not charge based on market value based their fee schedules on activity or time worked.
Should we charge fees on endowment funds if the value drops below the original principal?
In the survey, community foundations agreed that they should continue to charge administrative fees, even if a fund’s market value dropped below the contributed amounts. Below are three quotes from financial officers at community foundations:
"Administrative fees aren’t based on performance of the fund. We don’t increase fees when the market is good and can do ourselves harm by not charging what our services are worth.”
“Even though fund values decrease, there are still administrative costs associated with them, and those costs are not going away.”
“A fee is a fee is a fee. They are what keeps us open and providing the service we do.”
Community foundations should indicate in their fund agreements whether fees (for example, investment and administrative fees) will be charged on endowment funds that are below their historic dollar value. If such a provision is not part of a fund agreement, community foundations must engage their legal counsel to determine whether their state’s version of the Uniform Management of Institutional Funds Act (and the revised Uniform Prudent Management of Institutional Funds Act) allows spending for fees from underwater funds (individual endowment accounts whose market values are below their historic dollar value).
Should we allow a grace period to let the fund grow before we charge a fee on new and/or small funds?
Community foundations offered some caution about omitting fees on certain funds. “Not charging fees on new or small funds can cause problems down the road,” said one financial director. “It’s hard to explain to a donor or agency why your services used to be free (had no value), and now they’re not.” It may be better to make the case from the start that the community foundation is providing valuable services and should be compensated accordingly.
Also, consider this: If you don’t charge fees on all funds, some funds (those with fees) are essentially subsidizing others. This may be difficult to explain to those donors whose fees are paying for other funds.
So what’s the bottom line? “Be consistent,” said one community foundation colleague. “Factor in the long-term needs of your foundation and be able to make a case for what you decide.”