Pros and Cons of Federated Funds for Nonprofits and Donors

United Way volunteers with child. — The United Way is the best known federated fund. Screenshot by JFritz

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Updated on 08/07/19

What Is a Federated Fund?

Federated Funds have been a mainstay of nonprofit fundraising for decades. They originated with the Community Chests of the early 20th Century.

These funds gather a portfolio of charities to which they give. There is typically one extensive fundraising campaign each year that raises money from the general public, and, more important, from the employees of businesses or government agencies.

The most well-known federated funds are likely the United Way (a direct descendant of the Community Chest movement), the UNCF (formerly the United Negro College Fund), and the Combined Federal Campaign.

But there are many others at the state or community level. Most are distinguished by the ability to partner with employers and provide workplace-giving programs that usually feature payroll deduction.

Federated Funds have been favorites of businesses since they provided a safe and convenient way for their employees to contribute to charities. The downside of federated funds is that often new, small, or nonprofits with unique or offbeat missions may not be included.

Today, federated funds seem a bit old-fashioned and have not been as popular as in the past. Some of that has been because some companies pressured employees to donate to funds such as the United Way. Plus, any organization that has been around as long as the United Way probably has seen some controversy. But, more than anything, donors have changed. Today's younger donors enjoy picking their charities and forging more personal relationships with them.

Large companies now often manage their own corporate social responsibility programs. Those programs include not only raising funds for particular charities but also volunteer programs for employees and matching gift programs that enhance their employees' individual charitable donations. Even so, funds like the UNCF often forge strong relationships with many corporations. But the federated funds are no longer the only game in town.

At the local level, community foundations often serve the same purpose as federated funds. They raise money from the public in various ways and channel that money as grants to particular nonprofits.

Many community foundations also help local charities raise funds by coordinating a Giving Day where many charities join in fundraising using an online giving portal organized by the foundation.

What Are the Pros and Cons of Federated Funds for Nonprofits?

Federated funds can be a boon for nonprofits if they can satisfy the criteria of the fund. The fund does the work of raising money and donations come from individuals and companies that the nonprofit might never be able to crack on its own.

On the other hand, getting into the portfolio of a federated fund can be arduous. For instance, the Combined Federal Campaign states on its website that "Charities that apply to receive funds through the CFC are required to submit to extensive review of their financial and governance practices before acceptance."

You must apply to federated funds early and hope for the best. The chances are that established and well-known charities can make the cut, but smaller, more controversial charities likely will not. Even if your nonprofit is accepted, you have no control over how much of the raised money your charity might receive.

In any case, federated funds should be only one part of a nonprofit's fundraising. Every charity needs a variety of funding sources to be successful.

For donors, giving to a federated fund is easy. You can even have your donation taken out of your paycheck. Historically, It's one of the most successful ways to give to charity. And for a good reason.

Automatic payroll deductions for charity have several benefits such as:

Due to low administrative costs, more of your donation makes it to a charitable cause.
The automatic deduction allows you to spread your donations throughout the year, making it easier on your budget
Often employers match employee donations. Some do a 100 percent match while others might do 50 percent. Either way, you've leveraged your money.
It's a safe way to donate and saves the time of checking out charities on your own. The employer's plan sets standards for the charities featured in the program, making sure they are financially stable and have IRS approval.

However, "easy to use" is also the downside of automatic deductions for charity. Many of us like to choose our causes, and we enjoy a close relationship with those we support.

Today, it's likely that donors do give to federated funds when they can make it automatically through payroll deduction. But they also might provide less than in the past because they have their personally chosen portfolio of causes.