We Need Smarter Business-Owner Retirement Plans, Not More (Opinion) Small-business owners' optimism often hinders their retirement planning. Behavioral economics has some ideas about what it would take to get you to plan for your golden years.

By Scott Shane

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

shutterstock

Small-business owners don't save enough for their retirements. A December 2012 report by senior economist Jules Lichtenstein of the Small Business Administration, finds that self-employed people are less likely to have a retirement plan than people who work for others, even after taking to account many differences between the two groups of people.

Moreover, the fraction of self-employed people with retirement plans is surprisingly low. An earlier report by Lichtenstein shows that only 2 percent of small-business owners have a Keogh plan (a type of retirement plan for the self-employed) and only 18 percent have a 401(k) plan.

Although some believe that this low level of retirement savings demands the creation of additional retirement plans for small businesses, I don't think that's the answer. Washington has already created a lot of ways for small-business owners to save for retirement. But this cornucopia of plans has done little to boost the fraction of businesses whose owners save adequately for it.

Related: 4 Obstacles to Early Retirement and How to Overcome Them

Fixing the problem requires addressing how small-business owners think about retirement. Entrepreneurs are more optimistic than the rest of the population, researchers have found. While that optimism has many virtues, it leads small-business owners to believe that their companies' futures will be rosier than they actually turn out to be. Small-business owners think their businesses are less likely to fail, will generate greater profits and will sell for more than they actually do. These overoptimistic projections about the value of their companies lead many small-business owners underinvest in their retirements.

Behavioral economists have suggested some approaches that would boost the amount that small-business owners save for retirement. Here are a few:

  • Make small-business owners' retirement plans automatic. While small-business owners generally have the option to establish comparable retirement plans to those available to wage workers, they have to take the initiative to establish those plans by contacting banks and financial advisers. The need to be proactive about establishing a retirement plan lowers the odds that people will create them. If Washington made the establishment of these plans automatic, the fraction of small-business owners establishing retirement plans would likely rise.
  • Make it harder for small-business owners to opt out of the creation of retirement plans. Researchers have found that making people opt out of plans rather than opt in boosts participation. Policy makers could preserve small-business owners' freedom of choice but give them a nudge to set up retirement plans by changing the default from having no retirement plan to having a retirement plan. Those who didn't want to participate would be free to opt out, but they would have to actively do so.
  • Make setting up retirement plans simpler. The complexity of the process of establishing retirement plans deters small-business owners from doing so. Because people are more likely to choose to enroll in retirement plans if the process is simple, allowing people to set up these plans online with one or two clicks and only a couple of choices would increase the number of people willing to do so.

Behavioral economists have figured out that human psychology has profound effects on the way in which people make decisions about a wide variety of things, including how to save for retirement. If policy makers want to boost the number of small-business owners saving sufficiently for their retirement, they need to incorporate this information into the design of small-business owners' retirement plans, not just make more types of plans available.

Related: Five Retirement Plan Options for Your Business

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Related Topics

Marketing

The Rules of SEO Are Changing — Here Are 5 Powerful Strategies to Help You Rank in 2024

Do you need help to rank well on Google due to new algorithm updates? Discover five SEO strategies that work in 2024.

Leadership

Free Webinar | March 12: Master These 4 Things, and You'll Be a Natural Leader

Want to be a leader who gets results? Then join our webinar on March 12th as entertainment mogul Clinton Sparks gives you actionable guidance that will help you become a great leader.

Business News

Are You at Risk for Burnout? This Psychologist-Created Quiz Lets You Know in 5 Minutes

The burnout assessment tool was tested in seven countries using more than 10,000 survey responses.

Business Solutions

This Week Only: Switch to Windows 11 Pro for Just $32

Upgrade to Windows 11 Pro and save an extra 20%.

Diversity

How Black Entrepreneurs Are Challenging Industry Norms and Finding Powerful Paths to Success

In celebration of Black History Month, Entrepreneur contributor Terry Rice hosted a compelling Twitter Spaces conversation featuring Pariss Chandler, Kashmir Thompson and Chrishon Lampley that offered powerful insights for aspiring business leaders.