Castle Rock PEP

Unnecessary Introduction of Starter 401(k)'s

In the ongoing quest to bolster retirement security for American workers, recent legislative changes have introduced various options for small businesses. The Starter 401(k) and Pooled Employer Plans (PEPs) are among these. While both approaches have merit, a closer examination reveals that PEPs may render the Starter 401(k) unnecessary. Here’s why.


Creation and Limitations of the Starter 401(k)


The SECURE Act 2.0, enacted in December 2022, created the Starter 401(k) concept. This plan design aimed to give small businesses, especially those not currently sponsoring a retirement plan, a low-cost, streamlined option. While its intent is commendable, the Starter 401(k) may not be the best option for small employers considering the availability and benefits of PEPs.
Firstly, a critical limitation of Starter 401(k) is the absence of employer contributions. The plan design allows only employee deferrals. While this encourages personal savings, it misses employers’ opportunities to invest in their employees’ financial futures, not to mention bolster their own tax-free savings. On the other hand, PEPs allow for employee deferrals and employer contributions, amplifying the retirement saving potential for employees.
Secondly, while the Starter 401(k) is advantageous for businesses that want to offer a retirement plan without committing to employer contributions, these plans also have lower deferral limits — equivalent to the contribution limits for IRAs. Conversely, PEPs have the standard 401(k) contribution limits, allowing employees to save significantly more for retirement.
Furthermore, a Starter 401(k) can indeed be converted into a “regular” plan if an employer decides to begin making contributions. However, this necessitates another administrative process and potentially incurs additional costs. PEPs, on the other hand, provide a scalable solution that can evolve with the business’s financial capabilities and growth, mitigating the need for a plan conversion down the line.

PEPs best Starter 401(k)s at every turn

PEPs inherently offer a pooling of resources and responsibilities. By banding together with other small businesses, employers can reduce administrative costs, leverage economies of scale for investment options, and share fiduciary responsibilities. PEPs provide businesses with a robust and flexible retirement plan framework without the burden of individually shouldering the administrative and fiduciary load.
It’s essential to consider the future implications. With growing support for mandated retirement plans for small employers, like Colorado SecureSavings or Illinois Secure Choice, PEPs could see significant growth. They offer a sustainable and scalable solution.

Final Thoughts

Introducing the Starter 401(k) through the SECURE Act 2.0 is a well-intentioned move to extend retirement savings coverage. However, it’s essential to consider whether this new design is necessary given the existence of PEPs. Pooled Employer Plans offer a more flexible, scalable, and comprehensive retirement savings option for small businesses, potentially rendering the Starter 401(k) unnecessary.
For small businesses considering introducing a retirement plan or re-evaluating their current offerings, PEPs should be a significant consideration. While the Starter 401(k) provides a new pathway, PEPs offer a more robust road to retirement security for America’s workforce. It’s not just about initiating retirement savings but maximizing their potential.

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