Are You Putting All Your Eggs into Your Small Business Basket?
Scott Shane, professor of entrepreneurial studies at Case Western Reserve University, writes in Entrepreneur Magazine that small-business owners don’t save enough for their retirements. Citing senior economist Jules Lichtenstein of the Small Business Administration, he finds that self-employed people are less likely to have a retirement plan than people who work for others. The statistics are discouraging: 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. Many business owners don’t even understand that they can create plans for their businesses in addition to any personal retirement accounts they may have such as Roths and IRAs.
I give numerous seminars to small business owners on the best retirement plans for sheltering income, and I am finding much the same thing. One reason may be that entrepreneurs tend to be more optimistic than the average American. They assume that a large portion – if not all – of their retirement funding will come from the sale of their businesses in the future. As a result, they don’t worry about accumulating retirement savings outside their businesses. I have unfortunately also seen the opposite: struggling business owners borrowing from their IRAs and other personal retirement savings and plowing the money back into their businesses with the hope of keeping them afloat. Either approach can put their retirement goals at extreme risk.
The problem is not a shortage of appropriate plans but rather the entrepreneurial mindset. Shane suggests that some changes to the way plans are implemented might make the difference. His ideas include requiring small-business owners to create a retirement plan (or at least requiring them to have to proactively opt-out from doing so) as well as making it easier to set up retirement plans from an administrative standpoint.
I agree with Shane – anything that can be done to incent people to save for their retirement is a good thing. It’s possible, however, that there’s an additional factor leading to the dismal plan participation rate. I have met many sole proprietors and micro-business owners who have been so impacted by the 2008 recession that they simply are unable to generate any spare income to save.
Business retirement plans are not only valuable for the business owner but especially for his or her employees. Such a benefit could help in retaining existing employees and/or making the business more attractive to new talent. If you’re a small business owner and are among the majority that don’t currently offer any kind of retirement plan, the least you should do is investigate the possibilities.
Here’s a link to Shane’s blog on this topic: http://www.entrepreneur.com/article/225544