By: David Royal, Chief Investment Officer, Thrivent Financial January 10, 2018
Shepherding the generous donations of your congregation is an enormous responsibility. If your congregation has had the good fortune to build a savings account big enough to consider investing a portion of those savings in mutual funds or similar investments, there are five important areas to consider.
1. Managing Expectations
Before your congregation makes the decision to allocate a portion of its savings to the investment market, the board or council members should have a clear understanding of the risks and potential volatility of the markets and express a willingness to commit for both the short term and the long term.
Volatility is an ever-present part of the investment markets. The value of the congregation’s investment portfolio is likely to move up and down in the short term, but generally speaking, the longer you hold onto your investments the more likely they will be to experience positive performance. However, while the odds of positive returns have tended to improve with time, you still can lose money over both the short and long term. Make sure everyone involved is comfortable with those risks and the long-term nature of investing.
2. Setting a blueprint for managing your investments going forward
Your board should develop a concrete investment policy that can be pursued easily by future board members. Putting the policy in writing, with the terms, requirements, and budgetary guidelines may help contribute to the long-term viability of the investment policy while protecting both the congregation and the board members (or investment committee). The decision-makers who are tasked with overseeing the investment strategy should also be clearly identified in the organization’s by-laws or policy document.
The congregation or board should determine parameters for the investment policy.
For example, in setting the budget, your organization may consider designating and maintaining amounts in the following non-investment accounts:
- An emergency fund (such as $50,000) that may be deposited in a low risk liquid account such as a bank savings account or money market fund,
- An amount set aside for anticipated short-term expenses, such as salaries, utilities, and other monthly expenses, and
- An amount held in a safe reserve account for intermediate expenses and other anticipated costs.
Only the amount of savings beyond the emergency fund, the short-term expenses fund and the intermediate reserve would be considered for investment.
Your congregation might also set some limits on the investment fund. For instance, once it reaches a certain level, the board or congregation may be required to identify a project or cause to allocate a portion of that money to. Having a growing reserve of investment assets is a great luxury, but the members of the congregation may prefer to see that their generous donations are ultimately being used for the greater good rather than simply generating earnings in an investment account.
3. Matching the investment strategy to specific objectives and risk tolerance
In an era when most bank savings accounts and certificates of deposit are paying under 1%,1 your congregation may be interested in seeking a higher return by putting some of its money into an investment with the potential for a better return over the long-term.
Whether the goal is to save for future capital improvements, a scholarship fund, a mission program, or simply for a rainy day, investing in the markets may help your congregation achieve those goals.
Investing your congregation’s savings can be an even bigger responsibility than investing your own money. Others have been generous enough to donate their money, and they have the expectation that their contributions will be utilized prudently.
For that reason, your congregation or board should be careful to pursue an investment strategy that is in line with their goals, objectives and threshold for risk. The governing board should develop a strategy that lays out its reasons for investing, its goals and objectives, and its primary investment strategy. Are you investing for income, long-term growth, or for intermediate or shorter-term goals? Your board may consider diversifying within the portfolio to include separate components designed to achieve long-term, intermediate and short-term goals. For instance, for shorter term goals, you may consider investing in a more conservative mutual fund than you would for your long-term objectives.
One type of investment you might consider would be an “asset allocation fund,” which is diversified across a broad range of investments. Asset allocation funds are available for several risk levels, from aggressive and moderately aggressive (which have a higher portion of stocks) to moderately conservative (which have a higher portion of bonds). (See: Asset Allocation Funds Can Help Tame Volatility)
4. Your responsibility under the law
The board of directors of non-profit organizations, churches and other religious organizations has a fiduciary responsibility to exercise prudence in overseeing the funds of the organization. The board is subject to legal liability in administering their organization’s investment activities. Most states have adopted laws that set guidelines for the investment of assets held by non-profit organizations, including the Uniform Prudent Management of Institutional Funds Act and the Uniform Prudent Investor Act. (You can find more details on these rules at UniformLaws.com.)
While the guidelines tend to be fairly general, there are a couple of critical areas that are explicitly addressed. One key issue is diversification. When investing the assets of your organization, you are expected to spread the money around to different investments and asset classes in order to reduce risk. Although diversification does not eliminate risk, it may help reduce losses during market downturns.
Suitability is another important consideration. Your board is required to invest in assets that are deemed to be suitable, or appropriate, for your organization based on their risk tolerance and investment objectives. That means generally staying away from speculative investments, such as options, futures, small stocks, high-yield junk bonds, foreign stocks, and other types of investments that carry a higher than average level of risk.
However, your organization’s portfolio is viewed as a whole rather than by each of its parts. In other words, it may be acceptable if the portfolio or the mutual funds in the account include some higher risk individual investments, such as small cap stocks, high yield bonds or foreign stocks, if they represent a relatively small part of a diversified portfolio.
5. Tax implications
Qualified non-profit institutions, such as religious organizations, are typically exempt from income taxes on both donations and investment gains. Be aware, however, there are other sources of income that could be taxable, such as profits from unrelated businesses. (For more information, see: IRS Tax Guide for Churches & Religious Organizations.)
Before making a decision to invest a portion of the congregation’s savings, it is advisable that the investment plan be discussed with an accountant or tax advisor.
Managing your congregation’s savings is an awesome responsibility, with many moving parts. It will be up to the pastor, the board and the congregation to allocate that money prudently, and use it wisely.
A great way to get started investing is with mutual funds which have built-in diversification, which can help reduce risk, but not eliminate it. When you invest in a mutual fund, your dollars are invested in multiple securities which helps spread your risk. Learn more about Thrivent Mutual Funds.
You can learn more about opening a Thrivent Mutual Funds church account and download the application today online at Thrivent Business/Organization Account.
This information should not be considered investment advice or a recommendation of any particular security, strategy or product. At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.
1 Bankrate, September 2017