2 ways to increase the impact of the Starter 401(k)

We recently celebrated the first anniversary of Starter, which brings the Guideline platform experience to an even more accessible Starter 401(k). The Starter 401(k) was made possible through the SECURE 2.0 legislation passed at the end of 2022 to help more small businesses offer a retirement plan for the first time. The law created a streamlined employer-sponsored retirement plan, with benefits similar to an Individual Retirement Account (IRA) but offered through an employer.

There are a few main features that differentiate the Starter 401(k) from standard 401(k)s:

Guideline was the first provider to offer a Starter 401(k), and over the last year we found that the Starter 401(k) serves a market segment that has historically struggled to adopt a standard 401(k) plan for their business. This includes small and mid-sized businesses who may not be in a financial position to offer an employer contribution and often with a greater mix of lower wage and hourly workers. Guideline has set up thousands of new Starter plans, mainly for businesses with this workforce profile.

Although Starter 401(k)s are already making more savings possible, we have come up with two big ideas for how policymakers could make the Starter 401(k) even more impactful in the future.

Give businesses flexibility to change their plan type

Any business that begins with a Starter 401(k) can change to a standard 401(k) plan at the beginning of each year to enable employer contributions along with larger employee contributions. With the first year of Starter switch potential approaching, we’ve seen strong interest from businesses ready to offer a more robust retirement benefit. Unfortunately, this is currently only available once a year and is only a one-way street. The language of SECURE 2.0 does not allow plan sponsors to change from a standard 401(k) plan to a Starter 401(k).

From a public policy standpoint, we can see why this might be the case. If a business is offering a robust retirement benefit with employer contributions (Safe Harbor match formulas or otherwise) and higher employee contribution limits, why would we want to enable those business owners to change to a Starter 401(k) that may not be able to build up retirement assets as quickly?

But with the day-to-day realities of running a small business, this can be tough to maintain. Consider what small business owners have had to navigate over the last few years: high inflation and interest rates, extreme weather events, not to mention a major pandemic and associated economic shock. Why shouldn’t business owners have the flexibility to best serve their business and employees through changing times?

Each business owner could determine if they are in a position to offer an employer contribution and at what level. If they can, then in return they could get a higher annual contribution limit for themselves and their highly-compensated employees. It’s a win-win.

As a potential fix, legislators could enable plan sponsors to revisit their plan type a few times a year (say, as often as quarterly). At these checkpoints, sponsors could determine whether they should be in a Starter 401(k) or a standard 401(k) plan and should have the option to switch their plans.

Raise the annual Starter contribution limit

While we are improving the Starter 401(k), policymakers should consider raising the annual contribution limits to help more workers save more if they are able. A good landing spot would be $16,500 for 2025 (with annual adjustments as applicable) to line up with contribution limits for the SIMPLE IRA, which the Starter 401(k) displaces in the US retirement ecosystem. This would position the Starter 401(k) as a midpoint between the traditional IRA limit (remaining at $7,000 for 2025) and the standard 401(k) employee contribution limit (increasing from $23,000 to $23,500 in 2025).¹

We're committed to our mission of making it possible for more small businesses to help their employees save for retirement. We’ve seen so much interest in Starter in just this first year, and we look forward to continuing to help shape policy and legislation as it continues to evolve to meet the needs of today’s workforce.