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.

learn more about Scott Shane

By Scott Shane

shutterstock

Opinions expressed by Entrepreneur contributors are their own.

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).

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Culture

50 Work-From-Home Jobs that Pay As Much or More than Average Salary

If you're tired of driving to an office and would love to work at home, there are plenty of high-quality full-time work-from-home jobs for you.

Growing a Business

Are You Using the Most Powerful Marketing Tool on the Planet? Ashley Kirkwood Shows You How.

Learn how to make money from (and through) public speaking, even if you've never been on a stage.

Travel

6 Secret Tools for Flying First Class (Without Paying Full Price)

It's time to reimagine upgrading. Here's how to fly first class on every flight, business or personal.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Growing a Business

Chris Do of The Futur on his 1 Billion Mission

Interview with CEO of The Futur Chris Do about self development, creating the best content, and The Futur Euro Tour.