Nonprofit board guide
Nonprofit Investment Policy Statement
A nonprofit IPS turns asset stewardship into an operating framework: what each pool must do, who may decide, what boundaries apply, and which evidence the board will review.
Published by BoardReady IPS · Educational resource
What is a nonprofit investment policy statement?
A nonprofit investment policy statement is a board-approved document that defines the purpose and scope of invested assets, assigns decision rights, records objectives and constraints, sets implementation boundaries, and establishes monitoring and review. It should connect investment activity to mission, budgets, cash needs, donor restrictions, and governance—not merely state an asset allocation.
Why does a nonprofit need an IPS?
The board is responsible for stewarding organizational assets. The National Council of Nonprofits explains that an investment policy can help a board exercise oversight and establish how funds will be invested. A useful IPS gives current and future board members a common record of the assets covered, the decisions made, the reasons behind them, and the limits on delegated parties.
The policy cannot guarantee results or turn a checklist into prudence. It can make the process inspectable. A board should be able to trace each material rule to governing documents, a gift instrument, a financial plan, a cash-flow forecast, an approved risk discussion, provider due diligence, or another relevant record.
Separate assets that have different jobs
A frequent drafting error is to treat every dollar as one portfolio. A nonprofit may hold several pools with different purposes, horizons, liquidity needs, and controlling documents. Define each pool before applying investment rules.
| Pool | Primary job | Typical horizon and liquidity questions | Controlling evidence |
|---|---|---|---|
| Operating cash | Payroll, vendors, grants, and near-term obligations | When are payments due? What operating cushion is required? Which funds are immediately available? | Budget, cash forecast, bank and treasury policy, debt terms |
| Operating reserve | Absorb disruption or fund a defined contingency | What triggers a draw? How quickly must assets be available? Who approves use and replenishment? | Reserve policy, board resolutions, financial plan |
| Board-designated long-term fund | Support long-term mission under an internal designation | Can the board release the designation? Is annual support expected? What losses can operations absorb? | Board resolution, designation policy, minutes, budget |
| Donor-restricted endowment | Serve the duration and purpose established by donor restriction | Which amounts are available for appropriation? What restrictions and spending considerations apply at the fund level? | Gift instruments, fund records, applicable law, spending policy |
A board designation and a donor restriction come from different sources. The board generally should not assume it may change donor-restricted assets simply because it can change an internal designation. Identify the legal and documentary basis for every transfer or change. The IRS Form 990 Schedule D instructions distinguish board-designated or quasi-endowment funds from donor-restricted endowment funds for reporting purposes; counsel and accounting advisers should confirm how those distinctions apply to the organization’s records and actions.
Assign decisions—not just titles
The governing body typically approves the IPS and retains oversight. It may delegate defined responsibilities when permitted by governing documents and applicable law. Delegation should state its scope, how providers are selected, what they must report, and how their work is monitored. The organization’s committee charter, provider agreements, resolutions, and IPS should agree.
| Body or role | Questions the IPS should answer | Evidence |
|---|---|---|
| Full board | Which objectives, risk boundaries, allocation limits, spending links, exceptions, and amendments require board approval? | Bylaws, resolutions, approved policy, minutes |
| Investment or finance committee | May it select providers, rebalance, approve exceptions, or only recommend? What must it report? | Committee charter, calendar, reports |
| Staff | Who directs cash, communicates with providers, verifies reports, retains records, and escalates a breach? | Job roles, approval matrix, procedures |
| Advisor, consultant, or outsourced chief investment officer | Does the provider advise or decide? Which assets and limits apply? How are fees and conflicts disclosed? | Agreement, Form ADV if applicable, reports, due diligence |
| Investment manager and custodian | What mandate applies, who authorizes movement of assets, and how are holdings and transactions independently reported? | Mandate, custody agreement, statements, controls |
An outsourced chief investment officer (OCIO) is an external provider given defined discretionary investment authority. The acronym does not explain the scope. Record which decisions are delegated and which remain with the organization.
What should a nonprofit IPS include?
- Purpose and scope: name the legal entity, each covered pool, exclusions, and controlling documents.
- Objectives and horizon: explain what the assets support and when resources may be needed.
- Risk capacity and tolerance: distinguish the institution’s financial ability to absorb loss or illiquidity from its willingness to tolerate uncertainty.
- Spending and cash flows: link the IPS to reserve, spending, grantmaking, capital, or distribution policies; identify expected and stressed liquidity needs.
- Authority: separate approval, recommendation, execution, custody, reporting, monitoring, and exception powers.
- Allocation and constraints: document approved categories, targets, ranges, diversification, prohibited activities, concentration, leverage, derivatives, illiquidity, and mission-related directions.
- Rebalancing: assign triggers, discretion, timing, cash-flow use, exceptions, and reporting.
- Providers: define selection, monitoring, fees, conflicts, watch-list, and termination procedures.
- Measurement: define policy and manager benchmarks, calculation methods, fee basis, reporting periods, compliance evidence, and risk information.
- Maintenance: establish breach handling, amendment authority, scheduled and event-triggered review, approval records, and version control.
A policy benchmark is a comparison constructed to reflect the board-approved strategic allocation. The IPS should say which component indexes and weights are used and how often it is rebalanced. A provider’s composite or a generic market index may answer a different question.
How should risk and return be written?
Describe the mission consequence first. For example, an operating reserve can fail because it is unavailable when payroll is due even if its long-term return looks attractive. A long-term fund can fail if distributions, inflation, fees, and losses erode its ability to support future mission. Then identify measures and decision boundaries that address those outcomes.
The [POOL] exists to support [PURPOSE]. The portfolio objective is [BOARD-APPROVED OBJECTIVE] over [MEASUREMENT PERIOD], taking into account [WITHDRAWALS OR SPENDING], [INFLATION OR OTHER REFERENCE], fees, expected contributions, and liquidity. The organization can accept [DESCRIBE CAPACITY] because [EVIDENCE], but will not accept [MISSION-THREATENING OUTCOMES].
Do not present a sample percentage as a universal nonprofit answer. A suitable allocation depends on the assets’ job, cash flows, restrictions, risk capacity, resources, scale, implementation, costs, and advice.
How does a nonprofit board create and adopt an IPS?
- Collect. Gather governing documents, gift instruments, fund records, committee charters, provider agreements, budgets, cash forecasts, current holdings, fee information, and recent minutes.
- Map the pools. Identify which assets share a purpose and which require separate rules. Confirm restrictions before discussing transfers or spending.
- Agree on decision rights. Mark what the board retains and what it delegates. Align the committee charter and contracts.
- Frame institutional needs. Connect mission, time horizon, withdrawals, stressed liquidity, liabilities, gifts, and operating dependence to risk and return discussions.
- Draft openly. Use the working template; leave unresolved decisions marked rather than filling gaps with assumptions.
- Review. Compare the draft with controlling documents, applicable requirements, financial evidence, operational capacity, and qualified legal, tax, accounting, fiduciary, and investment advice.
- Approve and distribute. Use the authorized process, record the effective version and supporting minutes, provide the policy to responsible parties, and translate it into reporting and controls.
- Monitor and revisit. Put compliance, liquidity, fees, conflicts, provider oversight, and open decisions on a recurring committee agenda. Schedule a policy review and define event triggers.
Fictional nonprofit example
Illustrative only; not a client case. Harbor Youth Arts has $900,000 of operating cash, a $2 million board-designated reserve, and $1.4 million across donor-restricted endowment funds. The same advisor reports all assets, but the board discovers that one informal “balanced portfolio” rule has been applied to every account.
The board maps each pool. Operating cash needs a treasury procedure and short payment horizon. The reserve may support a facility project in three years, so staff prepare a forecast and the board defines draw authority. The endowment requires fund-level gift-instrument review and a connected spending process. The board then adopts one IPS with separate schedules for the long-term reserve and endowment, while operating cash remains under a treasury policy. That structure reflects different jobs; the example does not imply that every nonprofit needs the same document architecture.
Common nonprofit IPS questions
Does a small nonprofit need an investment policy statement?
Size alone does not answer the question. If the organization holds invested reserves or long-term funds, delegates decisions, or must coordinate restrictions and cash needs, a proportionate written policy can help. A small organization may need a shorter policy and simpler controls, but its authority and liquidity questions still need answers.
Should operating reserves and long-term funds have separate rules?
Usually when their jobs, horizons, liquidity, restrictions, or authority differ. They may appear as separate schedules under one policy or in separate policies. The key is that readers can identify which rule applies to which assets.
Can a nonprofit delegate investment decisions?
Defined responsibilities may be delegated when governing documents and applicable law permit, but the scope, selection process, reporting, monitoring, conflicts, and retained oversight should be explicit. Professional advice is necessary for the organization’s facts and jurisdiction.
How often should the policy be reviewed?
Set a regular cadence—many boards choose at least an annual read-through—and event triggers such as material changes in mission, cash flows, spending, gifts, liabilities, law, governance, providers, or portfolio structure. Review does not mean automatic amendment.