In spite of the current economic slowdown, the US nonprofit sector remains financially strong. Foundations and endowed nonprofit organizations have accumulated almost $1 trillion in investment assets, $450 billion of it belonging to foundations and more than $500 billion to endowed nonprofit organizations.¹ The portfolios of the largest of these institutions top $4 billion (Exhibit 1). Even allowing for a short-term slowdown in charitable giving—a slowdown that many nonprofit leaders expect—an additional $1.7 trillion to $2.7 trillion is projected to flow into the sector over the next 20 years.²

How this enormous wealth should be managed and how fast it should be spent are the subject of debate. To shed light on these questions, we employed a standard financial concept known as the "time value of money." The results of our analysis suggest that the current approach to building and distributing this wealth isn’t serving the best interests of society.

Foundations and endowed nonprofit organizations have traditionally been cautious in distributing their bounty. In 1999, foundations took in more than $90 billion in new contributions and investment returns but distributed under $25 billion.³ Indeed, foundations⁴ and endowed organizations⁵ have typically distributed about 5 percent...