Navigating Fiduciary Responsibilities in Nonprofit Investment Management

Nonprofit board fiduciary duties are a profound responsibility. Board members must carefully manage their organization’s mission and finances while acting with diligence, integrity, and foresight. This duty goes beyond good intentions and is a legal and ethical guide for every financial decision. This is especially true for endowments and investments. 

Whether you’re a seasoned board member or new to governance, understanding these principles is essential to fulfilling your role with confidence. 

What fiduciary duty means for nonprofit boards 

A fiduciary is legally and ethically bound to act in the best interests of the organization. As a board member of a nonprofit, you must follow the same fiduciary duties as a for-profit company. 

There are three core fiduciary duties of nonprofit board members: 

1. Duty of care: Making informed decisions with the same care an ordinary person would use in similar circumstances. 

2. Duty of loyalty: Prioritizing the organization’s interests above personal or external interests. 

3. Duty of obedience: Ensuring the organization complies with its mission, bylaws, and applicable laws. 

While the board holds ultimate fiduciary responsibility, many delegate investment oversight to a finance or investment committee. The meeting minutes and committee charters must clearly document this delegation. The board should regularly check reports and policies. This will help ensure they match the organization’s goals and legal requirements.

The Prudent Investor Rule and UPMIFA: Your legal guardrails 

The rule says that fiduciaries must invest assets carefully. They should use skill and caution. They need to think about the organization’s needs and the fund’s purpose. It’s not about avoiding risk entirely; it’s about managing risk wisely within the context of the entire portfolio. 

This rule encourages diversification and risk management, rather than chasing short-term gains. Complementing this is UPMIFA (Uniform Prudent Management of Institutional Funds Act), which has been adopted in most states. UPMIFA provides guidance on spending based on judiciousness, not just income. 

The act recommends regular reviews of policies and procedures. This is to adapt to changing economic conditions, inflation, and the needs of the organization. There are guidelines for managing “underwater endowments.” This happens when a donor-restricted fund’s value drops below the original gift amount. These guidelines focus on transparency and care. 

UPMIFA empowers nonprofit organizations to maintain mission continuity even during market downturns, provided decisions are well-documented and have forethought. 

Building (or refreshing) an Investment Policy Statement for nonprofits 

An Investment Policy Statement (IPS) is your roadmap for managing assets. It’s also necessary for maintaining alignment of your investment portfolio with the organization’s long-term mission. 

A strong IPS should include: 

• Objectives: Define the purpose of the funds (for example, long-term growth or income). 

• Risk tolerance: Outline acceptable levels of volatility. 

• Asset allocation: Specify target ranges for equities, fixed income, and alternatives. 

• Liquidity needs: Ensure access to cash for grants or operations. 

• Benchmarks: Set performance expectations and expected total return. 

• Rebalancing guidelines: Establish when and how to adjust allocations. 

Example of IPS language on investment objectives:

The primary objective is to preserve the real (inflation-adjusted) purchasing power of the assets while providing a stable and predictable stream of income to support the organization’s mission.

Also consider including a committee charter that defines roles, meeting cadence, and decision-making authority. 

Example of language in charter concerning members:

The committee shall consist of at least three members, including one board member and one financial expert. Members are appointed by the Board of Directors for staggered three-year terms.

Designing an endowment spending policy 

The spending policy determines how much of the endowment’s income from investments can be used each year. A well-crafted spending policy balances current needs with long-term sustainability. It also helps with transparency and consistency for supporting programs. 

There are a few common approaches for spending rules include: 

• Smoothing: Averaging market values over three to five years to reduce volatility. 

• Total return: Spending a fixed percentage (for example, 4% to 5%) of the portfolio’s value. 

• Hybrid: Combining smoothing and total return for added stability. For example, spending 4.5% of a rolling 3-year average of the endowment’s value. 

Set limits, like minimum and maximum draw rates. Also, run stress tests to see how different market situations could affect your endowment. 

Governance in practice: Process, minutes, and monitoring 

Strong governance is about policies as well as about execution. Turning policies and principles into consistent, documented actions can help protect the organization and advance its mission. 

The backbone of good governance is regular meetings to review performance and strategy. Typically, they are held quarterly or semi-annually. 

During meetings, review performance reporting to support informed decision-making. Take the opportunity to discuss external partners and internal controls at least yearly. 

Document every decision in the meeting minutes, especially those involving spending, rebalancing, or vendor changes. Documentation is critical for transparency and legal protection. 

OCIO vs. investment consultant 

As fiduciary responsibilities grow more complex, many nonprofits consider outsourcing to manage investments. 

An OCIO (Outsourced Chief Investment Officer) takes on the fiduciary role. They offer a comprehensive approach that includes managing portfolios, balancing in real-time, and improving risk oversight. An investment consultant offers advice but typically leaves execution to the committee.

When evaluating options, consider their experience with nonprofits, investment philosophy, and team structure. Put out a Request for Proposal (RFP) so you are clear on all costs, including hidden layers. Ask for reports that ensure investment performance is measured against appropriate indices. 

Special topics for committees 

Special topics for nonprofit investment committees go beyond the foundational duties of oversight and policy setting. These are nuanced, often situational areas that require deeper expertise, strategic thinking, and proactive planning.  

• Liquidity management: Planning for capital calls, grant cycles, and emergencies to help regulate cash flow. Committees must ensure the portfolio has enough liquid assets to meet these obligations without disrupting long-term investment goals. 

• Environmental, Social, and Governance (ESG) and mission alignment: UPMIFA allows for values-based investing if it aligns with donor intent and fiduciary standards. Committees may explore screening, impact investing, or shareholder engagement strategies. 

• Underwater endowments: UPMIFA allows continued spending from underwater funds, but only if it’s prudent. Committees should have a contingency plan in place and revisit it during volatile periods. 

• Communicating with stakeholders: Investment decisions can affect a wide range of stakeholders such as donors, staff, beneficiaries, and the public. Clear communication builds trust and reinforces the organization’s credibility. 

These topics require thoughtful discussion and scenario planning. 

Yearly fiduciary checklist for nonprofits

To stay on track, consider this annual checklist: 

• Review and update the IPS 

• Reassess the spending rate 

• Conduct rebalancing and liquidity tests 

• Perform vendor due diligence 

• Provide board education and document all meetings 

This routine helps ensure compliance, transparency, and alignment with your mission. 

When to engage a nonprofit investment advisor 

Partnering with an OCIO like Mercer Advisors can elevate and ease your fiduciary process. As a registered investment advisor with the SEC, we share your values. We are also required by law to act in your organization’s best interest. 

We offer institutional-grade investment management that matches the size of some of the largest foundations and endowments in the U.S. You get an integrated financial partner with our Endowments & Foundations team which provides enhanced governance and documentation. 

Beyond investing, you can benefit from a deep range of services when you partner with us. For instance, we offer opportunities for peer connection, along with education opportunities for donors and board members. 

If you are not a client and want to know more about our Endowment & Foundations services, approach, and team, contact us.