Investment Policy for Club Reserves: What Boards Should Put in Writing

A club with several million dollars in reserves has an investment decision to make, whether or not the board treats it as one. Leaving reserves in a checking account loses ground to inflation. Investing them too aggressively risks a shortfall when the roof or irrigation system comes due. A written investment policy settles these questions in advance and protects the board.

This guide covers what a club reserve investment policy should include, how to match investments to the capital plan, and issues specific to tax-exempt clubs. It is general information and not investment advice; work with a qualified advisor.

Key takeaways

• Priorities for most clubs: preserve principal, keep liquidity, then seek return.
• Match maturities to the capital plan's timing.
• Investment income counts toward the 501(c)(7) 35% limit and is generally taxable.
• Review the policy at least annually with the finance committee.

What an investment policy statement should cover

• Purpose and scope. Which funds the policy covers: operating reserve, capital reserve, designated project funds.
• Objectives in priority order. For most clubs: preservation of principal, liquidity to meet the capital plan, then return.
• Permitted investments. For example, FDIC-insured deposits, Treasury securities, government agency securities, high-grade money market funds and certificates of deposit.
• Prohibited investments. Commonly individual stocks, leveraged products, derivatives and illiquid alternatives.
• Maturity limits tied to the capital plan.
• Concentration limits, such as staying within FDIC insurance limits per institution or using insured cash sweep programs.
• Roles. Who selects advisors, who approves transactions, who reviews performance.
• Reporting. Monthly balances to the finance committee and an annual policy review.

Match investments to the capital plan

The reserve study tells you when money will be needed. Investments should mature in step with those needs. Money needed in the next year or two belongs in cash and very short-term instruments. Money for replacements five to ten years out can be laddered in longer high-quality fixed income. This approach, often called a ladder or liability matching, reduces the chance of selling at a loss to fund a project.

Tax considerations for 501(c)(7) clubs

For a tax-exempt social club, investment income counts toward the 35 percent limit on income from outside the membership and is generally taxable as unrelated business income on Form 990-T. A large investment portfolio relative to the club's gross receipts, or a large one-time gain, can push the club toward the limit. See 501(c)(7) nonmember income limits.

Section 512(a)(3) provides a limited exception for income set aside for certain charitable purposes, which rarely applies to capital reserves. Review projected investment income with your tax advisor each year when setting the investment strategy.

Board oversight

• The finance committee reviews balances, maturities and returns monthly or quarterly.
• The policy is reviewed annually and after any major change in the capital plan.
• Advisors are evaluated periodically on fees, performance against an agreed benchmark and compliance with the policy.
• Withdrawals from capital reserves require approval as set in the reserve policy.
• Investment accounts are reconciled monthly. See club balance sheet reconciliations.

See club finance committee charter for where the policy review fits in the annual calendar.

Common mistakes

• No written policy, so each new treasurer changes the approach.
• Reserves concentrated at one bank above insurance limits.
• Long maturities that don't match near-term capital needs.
• Investment income ignored in the 35 percent calculation.
• Operating and capital reserves mixed in one account.

A club CFO can draft the policy, coordinate with the investment advisor and tie the maturity schedule to the reserve study.

Working with an investment advisor

Many clubs use an outside investment advisor or a bank trust department to manage reserves within the policy. Ask advisors to describe their experience with nonprofit or club reserves, their fee structure in dollars at your balance, and how they will report against the policy each quarter. Fees matter more for conservative portfolios because expected returns are modest.

Give the advisor the capital plan so maturities line up with project timing, and have the club CFO or controller reconcile advisor statements to the general ledger monthly. The finance committee should meet with the advisor at least once a year to review performance, compliance with the policy and any changes in the club's capital needs.

Common questions

How should a private club invest its reserves?

Most clubs prioritize preservation of principal and liquidity, using insured deposits, Treasury and agency securities, high-grade money market funds and CDs, with maturities matched to the capital plan.

Does a club need a written investment policy?

Yes. A written policy sets objectives, permitted investments, maturity and concentration limits, roles and reporting, which protects the board and keeps the approach consistent across treasurers.

Is investment income taxable for a 501(c)(7) club?

Generally yes. It is unrelated business taxable income reported on Form 990-T, and it also counts toward the 35 percent limit on income from outside the membership.

How often should the finance committee review club investments?

Balances and maturities monthly or quarterly, and the policy itself at least annually.