The causes and consequences of genome reduction in animals are unclear because our understanding of this process mostly relies on lineages with often exceptionally high rates of evolution. Here, we decode the compact 73.8-megabase genome of Dimorphilus gyrociliatus, a meiobenthic segmented worm. The D. gyrociliatus genome retains traits classically associated with larger and slower-evolving genomes, such as an ordered, intact Hox cluster, a generally conserved developmental toolkit and traces of ancestral bilaterian linkage. Unlike some other animals with small genomes, the analysis of the D. gyrociliatus epigenome revealed canonical features of genome regulation, excluding the presence of operons and trans-splicing. Instead, the gene-dense D. gyrociliatus genome presents a divergent Myc pathway, a key physiological regulator of growth, proliferation and genome stability in animals. Altogether, our results uncover a conservative route to genome compaction in annelids, reminiscent of that observed in the vertebrate Takifugu rubripes.