An ERISA budget account is where many 401(k) plans quietly accumulate revenue sharing that the plan’s investments pay back to the recordkeeper. Some providers call it an ERISA spending account, a plan expense account or a revenue credit account. Whatever the label, once that money is credited for the plan’s benefit, it is generally treated as plan money, and deciding how to spend or allocate it is a fiduciary decision, not a bookkeeping entry.
This guide explains where the money comes from, what it can and cannot pay for, how to allocate what is left, and what records sponsors should keep so the account never becomes a question in an audit or a lawsuit.
Where the Money in an ERISA Budget Account Comes From
Many mutual fund share classes carry an expense ratio that includes payments to other parties: 12b-1 fees, sub-transfer agency fees, or shareholder servicing fees. When a recordkeeper receives those payments, it may use them to offset its own fee. If the payments exceed what the recordkeeper is owed, many contracts credit the excess back to the plan in a separate account.
That arrangement is indirect compensation, and it should appear in your provider’s 408(b)(2) fee disclosure. If you cannot find it there, that is your first question for the provider.
Why It Is a Fiduciary Issue, Not an Accounting Detail
Participants paid for that money through the expense ratios of the funds they hold. Once it is credited to the plan, the fiduciaries must use it prudently and solely in the interest of participants. The Department of Labor has addressed these arrangements in guidance, and the common thread is simple: the plan’s fiduciaries must know the account exists, understand the contract terms that govern it, and make documented decisions about it.
Problems usually look like this:
- Nobody at the company knows the account exists, so it grows year after year.
- The balance pays expenses that belong to the employer, not the plan.
- Leftover money is never allocated, or is allocated using a method no one wrote down.
- The contract says unused balances go somewhere the committee never approved.
What the Account Can Pay For
1. Reasonable plan administrative expenses
Expenses that are necessary to operate the plan, such as recordkeeping, third-party administration, the plan audit, Form 5500 preparation, required participant notices and plan-level consulting, can generally be paid from plan assets, provided the plan document allows it and the fee is reasonable.
2. Expenses the plan document permits
The plan document, and sometimes the trust agreement, controls whether plan expenses may be paid from plan assets at all. Read the expense provision before approving any payment.
3. Reimbursement of properly paid plan expenses
If the employer paid a legitimate plan expense out of pocket, some arrangements allow reimbursement from the account. That should be documented with the invoice, the approval, and a record of timing, and it should be handled conservatively.
What It Cannot Pay For
Settlor expenses are business decisions made for the employer’s benefit, and they are the employer’s cost. Typical examples include:
- Designing the plan or studying whether to add or change features.
- Negotiating a merger, acquisition or plan termination decision.
- Amendments that are optional design changes for the company’s benefit.
- Any payment that benefits the employer or another party in interest.
Using plan money for these costs can create a prohibited transaction, even when the amount is small and the intent is good.
How to Allocate What Is Left
An account balance that exceeds foreseeable plan expenses belongs back in participant accounts. The committee needs to choose a method, write it down, and follow it.
4. Per capita allocation
Each participant with a balance receives an equal share. It is simple, but it ignores the fact that participants with larger balances paid more revenue sharing.
5. Pro rata by account balance
Credits follow balances. It tracks who paid more in total, but not which funds generated the revenue.
6. Fund-by-fund return of revenue sharing
Some recordkeepers can credit revenue sharing back to the participants who held the specific funds that paid it. This is often described as fee levelization, and it addresses the fairness problem that participants in high-revenue funds otherwise subsidize everyone else.
7. Timing and a use-it-or-allocate rule
Accounts that carry balances indefinitely draw scrutiny. Many committees adopt a rule that any balance not needed for identified plan expenses within the plan year is allocated to participants, and they confirm the allowed timing in the recordkeeping contract. The treatment should be consistent with how forfeiture accounts are handled, since the two are often confused.
An 8-Step Self-Check for Your Plan
- Ask the recordkeeper in writing whether the plan has a budget, spending or revenue credit account.
- Get the current balance and a history of credits and debits.
- Match the revenue sharing sources to the fund lineup and the 408(b)(2) disclosure.
- Read the contract terms: who can direct payments, and what happens to unused balances.
- Read the plan document’s expense provision.
- Review every past payment and confirm each one was a plan expense, not a settlor expense.
- Adopt a written allocation method and timing rule.
- Record the decision in your committee meeting minutes.
Where Sponsors Get Hurt
- Not knowing the account exists. A fiduciary can’t monitor what it never asked about.
- Paying the wrong invoices. Plan design and business-transaction consulting billed to the plan.
- Letting balances sit. Money that is never used or allocated suggests no one is monitoring it.
- Revenue sharing driving fund choices. A fund should stay in the lineup because it passes your investment policy statement review, not because it funds the budget account.
- No comparison to the market. Periodic fee benchmarking shows whether total compensation, direct plus indirect, is reasonable.
- Participants not told. Credits and plan-paid fees should line up with what participants see in their 404(a)(5) fee disclosure.
What You Can Delegate and What You Can’t
A 3(16) plan administrator can track the account, reconcile credits against disclosures, review invoices for plan-versus-settlor treatment, and carry out the allocation method. An 3(38) investment fiduciary can select share classes with the fund lineup’s total cost in mind.
What stays with the employer: settlor decisions about plan design, and the business information only the company has, such as which invoices relate to a corporate transaction.
Who Is Accountable for the Decisions?
Most providers will administer an ERISA budget account but won’t take formal responsibility for the decisions behind it. Admin316 is different. We accept appointment as the plan’s ERISA 402(a) named fiduciary, a role most providers decline, so the governance decisions about plan expenses, allocations and oversight have an accountable owner with documented processes.
If you aren’t sure whether your plan has a budget account, or what has been paid from it, book a plan review with Admin316. We will help you find it, reconcile it, and put a written process around it.
