# Understanding Endowments: Types and Policies That Govern Them

![Endowment](https://www.investopedia.com/thmb/c9qW-uMekPYN9r8mvv_wQVR1M6g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/endowment.asp-final-4f4dec28b91946f6803202501b923af6.jpg)

*— Investopedia / Jake Shi*

> **Definition**
>
> An endowment is a financial gift to a nonprofit organization that maintains the principal amount while using the investment income for specific purposes defined by the donor.

## What Is an Endowment?

An endowment is a gift to a nonprofit organization to be used for a specific purpose.

The term endowment is also used to refer to the total investable assets of a nonprofit institution like a university. Also known as the institution's “[principal](https://www.investopedia.com/terms/p/principal.asp)” or “corpus,” it's used for operations or programs that are consistent with the wishes of the donor(s).

Most endowments are designed to keep the principal amount intact while the income is used to further the cause specified by the beneficiary. A [restricted endowment](https://www.investopedia.com/terms/r/restricted-fund.asp) must be held in perpetuity with only the income available for spending.

### Key Takeaways

*   Endowments are usually awarded by trusts, private foundations, or public charities.
*   They benefit nonprofit educational institutions, cultural institutions, and service-oriented organizations.
*   Most endowments come with restrictions that limit their use to the investment income of the fund, not the principal.

## Understanding Endowments

Endowments are typically organized as a [trust](https://www.investopedia.com/terms/t/trust.asp), [private foundation](https://www.investopedia.com/terms/p/privatefoundation.asp), or public charity. Many benefit educational institutions, Others go to cultural institutions including museums, libraries, religious organizations, private secondary schools, and service-oriented organizations such as retirement homes or hospitals.

Only a certain percentage of an endowment’s assets can be used each year in some cases so the amount withdrawn from the endowment could be a combination of interest income and principal. The ratio of principal to income can change from year to year based on prevailing market rates.

## Policies of Endowments

Endowment funds are governed by the guidelines of three components including an investment policy, a withdrawal policy, and a usage policy.  

### Investment policy

The investment policy lays out which types of investments a manager is permitted to make and dictates how much risk the manager can take in seeking the target return. Many endowment funds have specific investment policies built into their legal structure so the pool of money lasts for the long term.

The endowment funds of larger universities can have hundreds if not thousands of smaller funds that invest pools of money in various securities or [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp). The funds typically have long-term investment goals such as a specific rate of return or yield. The [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) or mix of investments within the fund is designed to meet the long-term returns in the fund’s objectives.  

### Withdrawal policy

The withdrawal policy establishes the amount the organization or institution is permitted to take out from the fund at each period or installment. It can be based on the needs of the organization and the amount of money in the fund but most endowments have an annual withdrawal limit.

An endowment might limit the withdrawals to 5% of the total amount in the fund. Most university endowments are established to last forever and therefore have annual spending limits.  

### Usage policy

The usage policy establishes the purposes for which the fund can be used. Endowments can have multiple uses whether they're set up by an institution or given as a gift by donors. These include ensuring the financial health of specific departments, awarding merit scholarships or fellowships, or providing other financial assistance to students.

University chair positions or endowed professorships can be paid with the revenue from an endowment, freeing up capital that can be used to hire more faculty. These chair positions are considered prestigious and are reserved for senior faculty.

Endowments can also be established for specific disciplines, departments, or programs within universities. Smith College has an endowment for its botanical gardens and Harvard University has more than 14,600 separate endowment funds.  

## Endowment Types

There are four types of endowments:

*   **Unrestricted Endowment:** This consists of assets that can be spent, saved, invested, or distributed at the discretion of the institution receiving the gift.
*   **Term Endowment:** The principal can be expended after a period of time or a certain event.
*   **Quasi Endowment:** A donation is made to serve a specific purpose. The principal is typically retained while the earnings are spent per the donor's specifications. These endowments are often started by the institutions that benefit from them via internal transfers or the use of unrestricted endowments.
*   **Restricted Endowment:** The principal is held in perpetuity while the earnings from the invested assets are expended per the donor’s specifications.

The terms of endowments can be violated only in exceptional circumstances. A court can issue a [cy pres doctrine](https://www.investopedia.com/terms/c/cy-pres-doctrine.asp) if an institution is facing bankruptcy but still has assets in endowments, allowing the institution to use those assets to improve its financial health while still honoring the wishes of the donor as closely as possible.

> **Important**
>
> Drawing down the corpus of the endowment to pay debts or operating expenses is known as “invading” or “endowment fund invasion” and it sometimes requires court approval.

## Requirements for Endowments

Managers of endowments have to deal with the push and pull of interests to make use of assets to forward their causes or sustainably grow their institutions. The goal of any group given the task of managing a university’s endowments is to sustainably grow the funds by [reinvestment](https://www.investopedia.com/terms/r/reinvestment.asp) of the endowment’s earnings while contributing to the institution.

Philanthropies, a category that includes most grant-making foundations, are required by federal law to pay out 5% of their investment assets on their endowments every year for charitable purposes at the risk of losing their tax-exempt status. Private operating foundations must pay 85% or more of their investment income. Community foundations have no requirement.

Substantially large university endowments must pay a tax of 1.4% on net investment income under the [Tax Cuts and Jobs Act of 2017](https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/). This tax is levied on endowments held by private colleges and universities with at least 500 students and net assets of $500,000 per student.

## Endowments and Higher Education

Endowments are such an integral part of U.S. academia that the size of a school’s endowment can be a fair measure of its well-being. They provide colleges and universities with the ability to fund their operating costs with sources other than tuition and provide rainy-day funds.

Older educational institutions such as the Ivy League schools have been particularly successful in building extremely robust endowment funds. They have the advantages of continued donations from wealthy graduates and good fund management.   

> **Fast Fact**
>
> Marcus Aurelius established the first recorded endowment in 176 AD for the major schools of philosophy in Athens, Greece.

## Criticism of Endowments

Harvard and other elite colleges have come under criticism for the size of their endowments. Critics have questioned their utility, likening it to hoarding.

Large endowments had been thought of as rainy-day funds for educational institutions but many endowments cut their payouts during the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp). A 2014 study published in the American Economic Review looked closely at the incentives behind this behavior and found a trend toward an overemphasis on the health of an endowment rather than the institution as a whole.

### Investment controversies

It’s not unusual for student activists to look with a critical eye at where their colleges and universities invest their endowments. Hampshire College divested from South African investments in protest of apartheid in 1977, a move that a large number of educational institutions in the United States followed.

Three universities with multibillion-dollar endowments, Harvard, Princeton, and Stanford, declined to accept millions they were set to receive as part of a $14 billion federal aid package for higher education included in the [CARES Act](https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707). Harvard University declined emergency COVID-19 relief money from the federal government three times including $25.5 million from President Biden’s American Rescue Plan.

## Real-World Examples of Endowments

The oldest endowments still active today were established by King Henry VIII and his relatives. His grandmother, Countess of Richmond, established endowed chairs in divinity at Oxford and Cambridge. Henry VIII established professorships in a variety of disciplines at Oxford and Cambridge.

According to the National Center for Education Statistics article, the top 10 U.S. universities by endowment size in 2023 were:

1.  Harvard University – $49.5
2.  University of Texas - $45.0
3.  Yale University – $40.7  
    
4.  Stanford University – $36.5
5.  Princeton University – $34.0
6.  Massachusetts Institute of Technology – $23.4
7.  University of Pennsylvania – $21.0
8.  Texas A&M University – $19.2
9.  University of Michigan – $17.8
10.  University of California – $17.7

### Harvard University endowment

Harvard officials expected the endowment to shrink in 2020 due to the impact of the pandemic on the economy and financial markets. They were wrong, however. It returned 7.3% on its investments and actually increased a bit.

Similar fears about 2021 proved even more unfounded. Powered by a rising stock market, the endowment returned a whopping 33.6% on its investments and grew by $11.3 billion to $53.2 billion.

The fund trod water in fiscal 2022, returning -1.8%, and 2.9% in fiscal 2023.

There are thousands of specific funds within the overall endowment fund for Harvard. The funds’ asset allocation was spread out through various types of investments, including:

*   Stocks: 11%
*   Hedge funds: 31%
*   Private equity: 39%
*   Real estate: 5%
*   Bonds: 6%
*   "Other" and cash: 7%

The endowment’s annual payout rate is typically capped. Harvard’s payout in 2023 totaled $2.2 billion.

Harvard’s endowment fund has consistently produced strong returns over the long term although ongoing infusions of capital in the form of new endowments also drive total growth.

## Where Do Endowments Get Their Money?

The endowment of a university or other nonprofit institution may be made up of many individual donations, each referred to as an endowment. Harvard's total endowment is more than $50 billion. That fund is made up of many individual gifts, each of which comes with its own rules. An individual donor may contribute a sum of money to be used strictly to fund research by the graduate Department of Anthropology.

The administrators of endowments spend only the investment income on an endowment in most cases, not the principal of the gift. That's a common stipulation of many endowments.

## Who Manages Endowments?

An institution that has an endowment may have an internal financial manager or hire an outside firm to manage the money. The Board of Trustees of the institution sets in place the rules for investing and spending the money in either case.

## Who Is Eligible for an Endowment?

An endowment is a gift to a non-profit institution. Any educational, charitable, religious, or scientific institution can be the recipient of an endowment. Creators of endowments are generally high-net-worth individuals or groups who want to contribute to a particular cause. The endowment allows them to be highly specific about how they want their money to be used.

## The Bottom Line

Some of the most prestigious universities in the U.S. have endowments of fabulous size. That may well annoy some of their students who are paying hefty tuition fees to study there but endowments can't be used to reduce everyone's tuition or even to keep the lights on. They're made up of many specific gifts from individuals and groups that specify their uses. They may underwrite certain research, create a scholarship, or fund a chair.

Endowments are meant to last in perpetuity. Only the investment returns and not the underlying assets are spent from year to year.

> **Article Sources**
>
> 1.  Brigham Young University Financial Services. "[Endowment Type Definitions](https://finserve.byu.edu/endowments-gifts/endowment-type-definitions)."
>     
> 2.  National Council of Nonprofits. "[Endowments](https://www.councilofnonprofits.org/running-nonprofit/fundraising-and-resource-development/endowments)."
>     
> 3.  The San Diego Foundation. "[Endowment Investment Policy](https://www.sdfoundation.org/wp-content/uploads/2015/08/endowment-policy.pdf)."
>     
> 4.  Smith College. "[Give to the Garden](https://garden.smith.edu/give)."
>     
> 5.  Harvard University. “[Endowment](https://www.harvard.edu/about-harvard/harvard-glance/endowment).”
>     
> 6.  Raymond James & Associates. "[Understanding the Types of Endowments](https://www.raymondjames.com/glennray/resources/2024/08/14/understanding-the-types-of-endowments)."
>     
> 7.  Cornell University, Legal Information Institute. "[Cy Pres Doctrine](https://www.law.cornell.edu/wex/cy_pres_doctrine)."
>     
> 8.  National Council of Non-profits. "[Endowments](https://www.councilofnonprofits.org/running-nonprofit/fundraising-and-resource-development/endowments)."
>     
> 9.  Council on Foundations. "[Foundation Basics](https://cof.org/content/foundation-basics)."
>     
> 10.  Internal Revenue Service. "[Definition of Private Operating Foundation](https://www.irs.gov/charities-non-profits/private-foundations/definition-of-private-operating-foundation)."
>      
> 11.  Foundation Center. "[Understanding and Benchmarking Foundation Payout](https://foundationcenter.issuelab.org/resources/14076/14076.pdf)." Page 1.
>      
> 12.  U.S. Congress. "[H.R.1 - An Act to Provide for Reconciliation Pursuant to titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018: Text: PART VIII--Exempt Organizations Sec. 13701. Excise Tax Based on Investment Income of Private Colleges and Universities](https://www.congress.gov/bill/115th-congress/house-bill/1/text)."
>      
> 13.  Medical College of Wisconsin. "[Philanthropy Stirs Innovation](https://www.mcw.edu/mcwknowledge/mcw-stories/philanthropy-spurs-innovation)."
>      
> 14.  American Economic Association. "[How University Endowments Respond to Financial Market Shocks: Evidence and Implications](https://www.aeaweb.org/articles?id=10.1257/aer.104.3.931)."
>      
> 15.  Amherst College. "[Divestment from South Africa](https://www.amherst.edu/campuslife/our-community/studentgroups/greenproj/divest/history-of-divestment-at-amherst/node/590306)."
>      
> 16.  The Harvard Crimson. "[Harvard Declines Federal Pandemic Aid for Third Consecutive Time](https://www.thecrimson.com/article/2021/8/13/harvard-rejects-arpa-funds/)."
>      
> 17.  University of Cambridge. "[About the University: Timeline](https://www.cam.ac.uk/about-the-university/history/timeline)."
>      
> 18.  University of Oxford. "[History](https://www.ox.ac.uk/local-community/engagement/part-of-oxford/history)."
>      
> 19.  National Center for Education Statistics. "[Fast Facts-Endowments](https://universitybusiness.com/the-top-20-university-endowments-of-2023/#:~:text=Among%20the%2020%20wealthiest%20universities,Hopkins%20University%20and%20Duke%20University.)."
>      
> 20.  The Harvard Crimson. "[COVID-19 Leaves Harvard in ‘Grave’ Financial Situation, Experts Say](https://www.thecrimson.com/article/2020/3/19/harvard-coronavirus-endowment-impact/)."
>      
> 21.  The Harvard Crimson. "[Harvard Endowment Returns 7.3 Percent for Fiscal Year 2020](https://www.thecrimson.com/article/2020/9/29/harvard-endowment-fy2020/)."
>      
> 22.  The Harvard Crimson. "[Harvard’s Endowment Soars to $53.2 Billion, Reports 33.6% Returns](https://www.thecrimson.com/article/2021/10/15/endowment-returns-soar-2021/)."
>      
> 23.  Harvard University. "[Financial Report Fiscal Year 2022](https://finance.harvard.edu/files/fad/files/fy22_harvard_financial_report.pdf)." Page 13.
>      
> 24.  Harvard University. "[Financial Report Fiscal Year 2023](https://finance.harvard.edu/files/fad/files/fy23_harvard_financial_report.pdf)." Page 12.
>      
> 25.  American Council on Education. "[Understanding College and University Endowments](https://www.acenet.edu/Documents/Understanding-College-and-University-Endowments.pdf)." Page 2.