Breaking Down Barriers to Build Assets

This commentary is part of a series highlighting the work of the 2012 Ideas for Action Award winners, sponsored by The Northwest Area Foundation, University of Minnesota, and University of Washington. This award recognizes organizations that take practical and innovative approaches to helping low-income individuals.

Individual Development Accounts, or IDAs, were developed as a means to help low-income families develop financial assets. In 1993, Iowa was the first state in the nation to pass IDA legislation, ahead of 34 other states that eventually followed. Even so, 19 years later, IDAs are still not widely known or utilized in Iowa.

Although IDAs are a proven strategy for asset development, they have not been deployed at a greater level in Iowa and nationally. This is due to the fact that they face challenges with sustainability and a lack of longitudinal evidence of their positive impact.

IDAs are matched savings accounts that allow low- and moderate-income families to build savings in order to accumulate financial assets. IDAs are usually maintained through a partnership between a local nonprofit and a financial institution. Families who utilize IDAs agree to complete financial education courses while they build their savings.

The successful expansion of these savings accounts faces two challenges.

The first is sustainability. Most IDA programs, whether rural or urban in scope, are based in a single nonprofit entity responsible for the complete delivery and sustainability of the program. This means the nonprofit staff needs to have expertise in all sectors necessary to run the IDA program: financial education, case management, marketing, fundraising, data collection, reporting, and perhaps evaluation.

Too often, nonprofits end up with one staff person assigned to manage the IDA program. This person may be excellent at case management, but may not have the skills necessary for the program in its entirety.

This problem is made worse by the lack of available funds for administrative needs. Grant funds for IDA programs are limited to 15 percent for administrative costs and 85 percent for matching funds. The assumption is that nonprofits must raise funds from other sources to completely cover the cost of an IDA program.

Most funders, however, do not want to pay for salaries, financial accounting, or other standard administrative costs. That leaves it to the nonprofit to solicit general contributions for administrative expenses. Yet most service-providing nonprofits are more likely to have grants for specific programs rather than for general contributions. They may struggle with identifying a core base of financial supporters, unlike charities that support more specific causes such as health or children۪s issues.

The second barrier to IDA implementation is a difficulty in acquiring evidence of the long-term positive impacts of these savings accounts.

It is typical for a nonprofit wanting to start an IDA program to approach a bank to hold the accounts, typically citing the Community Reinvestment Act (CRA). The CRA is designed to encourage commercial banks to serve all communities, including low- and moderate-income neighborhoods, consistent with safe and sound practices.

If a nonprofit can secure a bank partner, there are often regulatory limitations on how much financial data the bank can share with the nonprofit. They can share information specific to the IDA accounts, but may not be able to share any other account information that could help demonstrate an improvement in financial literacy, or an increase in use of financial products or services outside of the IDA account itself.

This often creates a weakness in program evaluation. Asking for more information may be seen as going outside the scope of the IDA and infringing on privacy laws.

To make matters worse, even if there is sufficient funding to run a robust IDA program, there may not be funding available to do an assessment or evaluation of IDA savers after they purchase their asset.

There is also no built-in incentive for a family using an IDA account to maintain a relationship with the nonprofit after their program is completed. It is unlikely that the nonprofit has the resources to do any kind of follow-up after the family has invested in financial assets and is no longer in need of services.

At the Iowa Credit Union Foundation, we have taken steps to avoid these common barriers. We base our IDA accounts at credit unions across Iowa, and we raise money as a 501(c)(3) public charity for matching funds and evaluation.

Credit unions can share aggregate participant data with the Foundation, including changes in financial behaviors based on a member۪s financial activity over time.

We partner with nonprofits across the state that offer homeowner education, business assistance, and financial education. In other cases, the credit union provides financial education.

Our focus is on collective expertise rather than creating duplication and competition. This model has commanded wide appeal, contributing to its success. We have received support from private foundations, local nonprofits, and a bipartisan group of Iowa State Legislators who appreciate the partnerships we have created between financial institutions and philanthropic organizations.

The barriers to IDAs are real, but our experiences have proven that they can be overcome. Making IDAs available not only encourages saving and financial literacy, it is a solid community and economic development tool, rural or urban, large or small.

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Marybeth Foster is the executive director of the Iowa Credit Union Foundation.

The views expressed in this commentary are those of the author or authors alone, and not those of Spotlight. Spotlight is a non-partisan initiative, and Spotlight۪s commentary section includes diverse perspectives on poverty. If you have a question about a commentary, please don۪t hesitate to contact us at info@spotlightonpoverty.org.