State-Sponsored Retirement Plans vs. Starter 401(k) Plans

State-sponsored retirement plans are designed for workers without access to employer-provided retirement options, offering simple, low-cost savings vehicles like IRAs. These plans are facilitated by state governments and often involve automatic enrollment. In contrast, Starter 401(k) plans, authorized by SECURE 2.0, allow small businesses to offer a simplified, low-cost 401(k) with contribution limits lower than traditional 401(k)s but higher than IRAs.
Author: Penelope Team
State-Sponsored Retirement Plans vs. Starter 401(k) Plans

Saving for retirement is not just a wise financial decision but a necessity. It's about making sure you’re financially secure in your golden years. The earlier you start, the more time your money has to grow, thanks to the power of compounding. At Penelope, we help simplify retirement planning for businesses of every size. 

This guide will help you understand the difference between a state-sponsored retirement plan and the new Starter 401(k) plans rolling out in 2024. Let's dive in!

What are State-Sponsored Retirement Plans?

A state-sponsored retirement plan is a program initiated by a state to help its residents save for retirement. Since nearly 57 million Americans don’t have access to an employer-sponsored retirement plan, these state-sponsored plans are helping to fill the gap so everyone can start saving for their future. 

These programs are typically designed as Roth Individual Retirement Accounts (IRAs) where employee contributions are deducted directly from their paychecks. State-sponsored retirement plans offer an alternative for self-employed individuals, small business owners, and employees whose jobs don't provide retirement plans.

Related Reading: Which States Have Retirement Plan Mandates in Place?

What is a Starter 401(k) Retirement Plan?

A Starter 401(k) retirement plan is a new retirement savings option for small businesses and self-employed individuals that is new in 2024. This type of plan was created as part of the SECURE 2.0 Act, which was signed into law in December 2022. It's aimed at employers who want to offer a retirement savings plan for their employees but may not have the resources or need for a traditional 401(k) plan.

The Benefits of Choosing a Starter 401(k) Retirement Plan Versus a State-Sponsored Retirement Plan

Here are the main distinctions between state-sponsored retirement plans and a Starter 401(k), such as the one offered by Penelope:

  1. Tax Credits: With a company-sponsored 401(k) plan, businesses can take advantage of tax credits. For instance, eligible businesses can claim a tax credit of up to $16,500* for three years for the costs of starting a qualified retirement plan.
  2.  
  3. No AUM Fees: Penelope does not charge any Assets Under Management (AUM) fees. This is in contrast to some state programs like CalSavers which may have AUM fees taken out of the retirement account.
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  5. Investment Customization: With a company-sponsored 401(k), there can be more flexibility in choosing what you invest in. In contrast, investments in state-sponsored retirement plans are chosen by the state and may not allow for customization.

Choosing the right retirement plan involves considering various factors, including your financial goals, risk tolerance, and investment preferences. Whether you opt for a Penelope plan or another option, the important thing is to start saving for retirement as early as possible.

Why Choose Penelope’s Starter 401(k) Retirement Plan?

When you work with Penelope for your retirement needs, you not only can claim tax credits* for setting up a 401(k) plan, but the Penelope team is with you for every step along the way.

    1. Assistance with Setup: Penelope’s team assists your employees with the setup process, ensuring a smooth transition into the plan. Through automatic enrollment emails and customer support, you won’t have to add another responsibility to your full plate.
    2.  
    3. Handling IRS Testing: Penelope takes care of any necessary IRS testing, relieving the employer of this responsibility, meaning you have more time to focus on growing your business.

    4. Ease of Maintenance: With a Penelope 401(k) retirement plan you can get set up in 15 minutes after connecting your payroll provider to our platform.

No hidden fees: What you see is what you get! Penelope doesn’t charge any AUM fees for managing your company’s 401(k) plan.

While a state-sponsored retirement plan can be a helpful option for some businesses, a Starter 401(k) — especially one offered by Penelope — provides a great deal of flexibility, ease of use, and support that can make it an excellent retirement choice for many businesses.

What Businesses Should Consider a Starter 401(k) Retirement Plan?

A Starter 401(k) is often a good fit for small businesses and startups, particularly those with limited resources to dedicate to retirement benefits. Here are some organizations that could benefit the most from a Starter 401(k)

  • Small Businesses: The simplicity and affordability of a Starter 401(k) make it ideal for small businesses that may not have the resources or need for a more complex, traditional 401(k) plan.
  • Companies New to Retirement Plans: If a company has never offered a retirement plan before, a Starter 401(k) can be an easy first step. It allows the company to provide a valuable benefit to employees without a significant administrative burden.
  • Businesses Wanting Simplicity: For businesses that want to avoid the administrative complexities associated with traditional 401(k) plans, a Starter 401(k) offers a simpler option.
  • Companies Seeking to Attract Talent: Regardless of size, companies in competitive industries might use a Starter 401(k) as part of a comprehensive benefits package to attract top talent.
  • Startups: Startups often prioritize growth and may not have the financial capacity to set up a traditional 401(k). A Starter 401(k) can be a cost-effective way to attract and retain employees by offering retirement benefits.

Remember, while a Starter 401(k) can be a good fit for many businesses, it's important to consider the specific needs and capabilities of your business before making a decision. Consulting with a financial advisor can help you understand whether a Starter 401(k) is the right choice for your business. 

“With the Starter 401(k), small business owners have an affordable option they can offer their employees. The benefits are countless. The most important thing is to just get started.” -Jean Smart, Penelope CEO and Founder

→ Tell us about your business and get a recommendation on which Penelope Plan is a fit for your business

Penelope Starter 401(k) Retirement Plan Frequently Asked Questions

Who can offer a Penelope Starter 401(k)? 

Employers that do not already offer a qualified retirement plan to their employees may be eligible to sponsor a Starter 401(k). 

Which employees are eligible to participate in a Penelope Starter 401(k)? 

Full-time and part-time employees, as well as interns, seasonal and temporary workers, and other W-2 classifications, are eligible to participate. Union workers, 1099 contractors, and non-resident aliens** are excluded from participation.

Can I customize my Penelope plan to fit my business needs? 

Yes, you can customize the plan’s eligibility criteria. The options you can choose are as follows: 

  • Age of participant: 18 or 21 years old 
  • Time of service: Immediate, 3 months, 6 months, or 12 months

What if my employees do not want to be auto-enrolled in the retirement plan? 

All eligible participants can opt out of participation once they have been invited to participate in the plan. 

* Please consult with your accountant for personalized financial advice on claiming tax credits

** Non-resident aliens that are excluded from participation do not pass the substantial presence test and do not earn U.S. income. 
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