While small businesses represent a key source of employment and income in the United States, one challenge faced by many small business owners is how to deal with retirement for themselves and their employees. According to the U.S. Small Business Administration (2007), there are about 25 million small businesses in the United States and they employ more than 50% of the nation's private workforce and are consistently responsible for creating around 75% of net new jobs. Small businesses have been considered as the economic engine of many American communities but, on the other hand, the accomplishments of small businesses come with challenges and risks. For example, following the discussion about small business health care crisis that has received a lot of publicity in recent years, many scholars and policymakers have pointed out that the United States is facing a small business retirement crisis that may affect far more small business owners and employees (Guard, 2006; Smyth, 2006; Devaney and Chien, 2000).
According to the statistics from some recent surveys (Girard, 2006), more than 60% of American small business owners do not offer any retirement plan to their employees and 47% of small business owners are unsure about how they plan to handle their own retirement. The situation is much worse for sole proprietors who work by themselves as only 6% of them have a 401(k) plan. According to the 2003 Small Employer Retirement Survey conducted by the Employee Benefit Research Institute (EBRI, 2003), 43% of the small companies not offering a retirement plan to their employees said they were not at all likely to start a plan in the next two years, up from 32% in the survey of 1998. A study by Fidelity in 2006 suggested that most small businesses realized the benefits of offering a retirement plan but many did not realize a plan was available to them (Fidelity, 2006). The same study also reported the 26% of the small business owners surveyed by Fidelity believed there was a lack of 401(k) plans to suit their company's small size and 40% of the respondents perceived cost as the major barrier in offering a 401(K) plan to their employees.
There are many studies on retirement planning and programs in the literature but few of them have focused on small businesses. Specifically, there is a dearth of information on how small business owners deal with retirement for themselves and their employees, especially for businesses with no employees or a small number of employees. This study is motivated by this lack of information on small business retirement plan participation and the need for information. Our major objective is to collect primary data through a mail survey of Vermont small businesses with less than 20 employees and to use the data to analyze how Vermont small businesses deal with retirement planning and financial management.
Our objectives were accomplished in two ways: (1) a survey of Vermont small business owners was developed and conducted to collect primary data in 2003, and (2) the primary data collected from the survey were analyzed to test alternative hypotheses and to derive conclusions using appropriate statistical methods.
A random sample of 3,000 Vermont businesses with less than 20 employees was purchased from Survey Sampling, a research firm located in Fairfield, Connecticut. The 3,000 businesses were randomly selected by the research firm from all Vermont businesses with fewer than 20 employees. The business size was limited to fewer than 20 employees based on the focus of this study. Information from the research firm includes business name, address, size, phone number, industrial code, etc.
A survey questionnaire was developed at the University of Vermont. It included questions about business ownership, participation in retirement plans, needs for retirement and financial management information and the preferred way to receive such information, and demographic information, etc. The questionnaire was pre-tested through a focus group of small business owners and their comments and suggestions were incorporated in the revision. The survey was conducted in three steps: (1) A copy of the questionnaire together with a cover letter from the University of Vermont Extension System and postage-paid return envelope was mailed to each of the 3,000 businesses during the first week of February 2003. (2) A post card was mailed to 1,500 businesses that were randomly selected from the 3,000 businesses two weeks after the first mailing. The post card was mailed to only 1,500 of the 3,000 businesses due to our budget constraint. (3) For the 1,229 surveys returned by the post office due to undeliverable address (no longer in business, incorrect addresses, moved out of Vermont, etc.), the post office provided new addresses for 150 of them and the surveys were mailed to 120 of them with Vermont addresses (the other 30 businesses moved out of Vermont). We received a total of 828 usable responses and the survey yielded a response rate of 43.8%, out of an original sample size of 3,000 once we removed from the sample the 1,109 businesses that had eitehr undeliverable addresses or had moved out of Vermont. The overall response rate of 43.8% is considered to be very good as compared to many other mail surveys and this high response rate was likely due to that many Vermont small businesses are familiar with the University of Vermont Extension System.
The primary data collected from the 828 respondents were first analyzed using Chi-square test and T-test to examine the differences between those who participated in at least one retirement plan and those who did not participate in any retirement plan. Logit regression analysis was then conducted to identify the factors that might have contributed to the likelihood of participation in a retirement plan and the likelihood of interest in retirement information. The analysis results are reported in the next section.
Data collected from the survey were first analyzed using Chi-square test and T-test to identify significant differences between the two groups of small business owners (those who have participated in at least one retirement plan and those who have not participated in any retirement plan). Results reported in Table 1 suggest several conclusions. First, 57.9% of the surveyed respondents indicated they have participated in at least one retirement plan and 42.1% indicated they had not participated in any retirement plan. Second, the two groups are not statistically significantly different in age, planned age of retirement, age when they began working, household size and years in business. Note that the critical value for significance used in this study is P< 0.05 and Table 1 included only the test statistics that are significant at the 0.05 significance level. Third, for the significant variables, small business owners who participated in at least one retirement plan had significantly higher education level, were more likely to be in the business of professional and financial services, less likely to be in agriculture and retail business. They were more likely to have 5-19 employees, and less likely to be interested in information on debt management and money management.
Respondents were also asked to check the type of their retirement plans and the results are summarized in Table 2. As shown in the table, among the 463 respondents who participated in at least one retirement plan, the most common type of retirement plan is an Individual Retirement Account (IRA) (65.4%), followed by a Simplified Employee PlanIRA (SEP-IRA) (29.4%), SIMPLE from present position (12.5%), and 401k or 403 (b) from present position (9.9%) or former position (9.7%). Note that the table includes both the percentages of respondents and the percentages of responses, because some respondents have participated in more than one retirement plan.
When asked about the type of retirement plans their spouses or partners have, the most frequent response from the 370 respondents whose spouses or partners have participated in at least one retirement plan is an IRA (60.8%), followed by 401 k or 403(b) from his or her present positions (38.9%), SEP-IRA from his or her present position (11.6%), and 401k or 403(c) from his or her former positions (11.1%). These results are reported in Table 3.
For the purpose of improving the small business education programs offered by the University of Vermont Extension System, the survey included questions about small business needs for information on debt management, investment, money management and retirement and the preferred ways of receiving such information. The results reported in Table 1 indicate that the proportions of the 828 respondents interested in information on debt management, investment, money management and retirement were, respectively, 22.9%, 33.2%, 32.0% and 34%. Results reported in Table 4 suggest that the most preferred methods of receiving information were brochure and direct mail and the least preferred methods were classes at work, classes elsewhere, and internet web pages.
When the respondents were asked if they plan to continue to work after retirement age, 61% of them responded that they would, 34% of them were not sure, and only 5% indicated that they did not plan to work after retirement age. While this finding suggests that most small business owners are likely to continue to work after retirement age, the survey did not ask about reasons for planning to work after retirement age. This fording is quite consistent with the result reported by Girard (2006) that 55% of surveyed small business owners said they never plan to retire and 62% had no exit plan at all.
Table 5 shows the relationship between retirement plan participation of business owners and an employer-based retirement plan offered to employees. Results indicate that 389 or 47% of the surveyed businesses did not have any employees and the remaining 439 or 53% businesses had one to 19 employees. For the businesses with at least one employee, 74.9% of them did not offer any retirement plan to their employees. Table 5 also suggests that business owners who participated in at least one retirement plan are more likely to offer retirement plans to their employees (42.9%) as compared to those who had not participated in any retirement plan (2.1%). Several business owners made the comment that it was too much work to offer employer-based retirement plans.
Two logit regression models were estimated to identify the factors that might have affected the probability for a small business owner to have participated in retirement plans and the probability for business owners to be interested in retirement information, respectively. The results are reported in Table 6 and Table 7. Numbers reported in the last column of Table 6 and Table 7, Exp(B), can be interpreted as the marginal impact of the independent variables on the odds for the dependent variable to be 1. For example, an Exp(B) value of 1.0 in the last column for a particular independent variable means that a change in the independent variable has no impact on the odds for the dependent variable to be 1 (i.e., it is equally likely for the dependent variable to be 1 or 0). On the other hand, an Exp(B) value of 1.5 means that the odds for the dependent variable to be 1 increases 0.5 (i.e., it is 50% more likely for the dependent variable to be 1 than to be 0) when the independent variable increases by one unit. Similarly, an Exp(B) value of 0.4 means that it is 60% less likely for the dependent variable to be 1 than to be 0 when the independent variable increases by one unit.
The first model with an overall prediction power of 72% suggests five conclusions (see Table 6): (1) business owners with less than five employees are less likely to participate in retirement plans and business owners with more than nine employees are more likely to participate in retirement plans, (2) respondents who are concerned about social security are more likely to participate in retirement plans, (3) respondents with a retirement plan from previous jobs are very likely to keep the retirement plan, (4) people with higher level of education are more likely to participate in retirement plans, and (5) business owners are a little bit less likely to participate in retirement plans if their spouses have participated in retirement plans. Note that each of the above conclusions is based on the condition that all other variables in the model are held constant.
The second model with an overall explanation power of 67% suggests four major conclusions (see Table 7): (1) respondents who are concerned about social security are less likely to be interested in retirement information and one possible explanation is that they might have already obtained retirement information, (2) respondents who have worked more years or with higher education are slightly less likely to be interested in retirement information, (3) respondents with more children under 18 are more likely to be interested in retirement information, and (4) respondents who have already participated in retirement plan are less likely to be interested in retirement information. Similar to the first logit model, each of the above conclusions is based on the condition that all other variables in the model are held constant.
Although the importance and benefits for small business owners to participate in and offering retirement plans to employees are well documented (Fidelity, 2006), a majority of small businesses in the United States do not offer any retirement plan to their employees and many of them do not have any retirement plan for themselves. The lack of retirement savings for small business owners and employees is partially due to the observation that increasing numbers of small business owners, managers and employees have paid more attention to salary rather than benefits and security, and fewer and fewer pensions are available to workers in small companies. As a result, the responsibility to make investments and assume the risks for retirement has been increasingly shifted from employers to employees (Schultz, 1999). According to the U.S. Department of Labor (2000), workers in small companies are significantly less likely to be offered retirement and pension plans as compared to workers in large companies. Results from this case study of 828 small businesses with less than 20 employees in Vermont confirm that the lack of small business retirement plan participation and saving, especially small business employees, is a problem that requires more research, education programs, and policy interventions.
Primary data from 828 small business owners with less than 20 employees in Vermont indicate that 42% of them did not participate in any retirement plan. For businesses with 1 to 19 employees, 75% of them did not offer any retirement plan to their employees. The lack of retirement savings for small business owners and employees in the United States has significant implications. Many small business workers may face poverty after retirement age. As suggested by Leibowitz (1999), more than 50% of workers without a pension or retirement plan may have social security as their sole retirement income. This implies that many workers working for small businesses may depend on social security payment after retirement and many of them may have a high chance of facing poverty due to reductions in social security benefits. While social security was begun with the notion that it would only act as a supplement to other sources of income in retirement, increasing numbers of retired people are depending on social security payment due to their lack of retirement savings. Leibowitz (1999) estimated that the average social security recipient received approximately $6,000 per year in 1999 as compared to the $8,959 poverty threshold for a person at age 65 or above. While the U.S. Social Security Administration (1998) estimated that social security can not be expected to replace more than 40% of preretirement income, the reality is that many Americans rely on social security too much. For example, according to a survey conducted by the Retirement Corporation of America (2002), 23% of the surveyed respondents "intend to rely on social security as their main source of income in retirement." The unrealistic expectations about social security payments and our aging population may increase the uncertainty and risk level of our social security system. Retirees currently count on social security for about an average of 40% of their retirement income but, in the future, social security may provide only 14% of retirement income and the rest will have to come from retirement saving and other sources (Girard, 2006).
While Fronstin (1999) reported that slightly more than one-third of men and women in his study had not thought much about retirement, this study indicates that less than one third of small business owners were interested in retirement information. To begin to change the situation, we need to educate small business owners on the importance of planning for retirement. Not only should we begin to think about education, but also we need to find an appropriate way to relay such information. Through this survey, we found that the majority of small business owners who were interested in retirement information prefer to receive information from brochures and direct mail. Although a previous study (Oison et al., 2000) identified the Internet as a growing trend for individuals to receive information, this present study did not support that finding for the population of small business owners in Vermont. However, as one limitation of this study, the survey neglected to ask if the respondents have access to the Internet. A lack of internet access may be a reason for many people disliking the Internet as a way to obtain retirement information.
Our finding that many small business owners planned to continue to work after retirement agrees with previous studies (Fronstin, 1999; Goldberg, 2000). In addition, since most of the respondents could be classified in the group of baby boomers on average, the finding about their lack of plans for retirement and desire to continue to work also agrees with Powell (2001). The majority of small business owners seem to hold a self-fulfilling prophecy that, if they do not plan for retirement, they will continue to work. Working until you drop may have been considered as one solution to the lack of retirement savings for small business owners and employees but it is hardly realistic and many employees may not even have that option. Educators and policy makers must recognize the need to help small business owners by providing current information about many financial topics such as alternative retirement plans and the implications of early retirement planning for future lifestyle choices. Educational programs for young small business owners on the time value of money and how saving at a young age would allow retirement savings to grow more steadily than money saved later, may reverse this trend.
This case study presents some significant findings about how small business owners deal with retirement for themselves and their employees based on primary data from a survey of small business owners in Vermont. Results from 828 small business owners with less than 20 employees indicate that 42% of them did not participate in any retirement plan and, for the 439 businesses with one to 19 employees, 75% of them did not offer any employer-based retirement plan to their employees. Results also show that 66% of the respondents were not interested in retirement information and, for those who were interested, the preferred ways of receiving such information were brochures and direct mail while the least preferred ways were classes and internet web pages. Although this study is based on a survey of small business owners in the state of Vermont, small business retirement is clearly a national problem and this study is expected to contribute to our understanding about the problem.
While small businesses play an important role in the U.S. economy, the lack of retirement savings for so many small business owners and employees is alarming and may suggest a small business retirement crisis on the horizon. Based on primary data from 828 small business owners, this study presents some findings that may be interesting to policymakers, educators, small business owners and employees. The findings call for more policy initiatives, programs, and research for encouraging and helping more small businesses to develop retirement programs for their owners and employees. The alarming situation of small business retirement requires collaborative and aggressive efforts for reducing the socioeconomic effects of a small business retirement crisis.
Devaney, S. A. and Y. W. Chien. 2000. "Participation in Retirement Plans: A Comparison of the Self-Employed and Wage and Salary Workers," Compensation and Working Conditions 5, no. 4: 31-36.
EBRI (Employee Benefit Research Institute). 2003. "The 2003 Small Employer Retirement Survey Summary of Findings," http://www.ebri.org/surveys/sers/index.cfin?fa-sers2003
Fidelity. 2006. "Fidelity Research Shows Four in Ten Small Business Owners Perceive Cost to be a Major Barrier in Offering a 401 (K) Plan," http://content.members.fidelity.com/Inside_Fidelity/ fullStory/l,,7165,00.html
Fronstin, P. 1999. "Retirement Patterns and Employee Benefits: Do Benefits Matter?" Gerontologist 39: 37-47. Girard, K. 2006. "Small Business Retirement Crisis on the Horizon," http://allbusiness.sfgate.com/humanresources/ employee-benefits-retirement/4057857-1.html
Goldberg, B. 2000. Age Works. New York: The Free Press.
Leibowitz, M.L. 1999. "Financial Strategies for a New Century: Tips from America's Experts," TIAA-CREF Teleconference, University of Vermont, Burlington, Vermont, October 22.
Olson, C.M., B.S. Rauschenbach and W.R. Lacy. 2000. Survey of New York State Residents. Ithaca: Cornell Cooperative Extension.
Powell, E.A. 2001. "Retirees Return to the Work Force," Burlington Free Press (Business Monday, April 30). Retirement Corporation of America. 2002. http://therea.com/
Schultz, E.E. 1999. "Problems with Pensions: What You Don't Know about the New Cash-Balance Retirement Plans Can Hurt You," Wall Street Journal (November 8).
Smyth, A. 2006. "Survey Says Many Americans Relying on Social Security too much," http://www.theinsurancepoicy.com/2006/11/survey says many americans-rel.html
U.S. Social Security Administration. 1998. Social Security: Retirement Benefits. Washington, DC.
U.S. Department of Labor. 2000. "Coverage Status of Workers under Employer Provided Pension Plans," http://www.dol.gov/ebsa/publications/99pensionreport.html
For further information on this article, contact:
Dr. Qingbin Wang, 205C Morrill Hall, University of Vermont, Burlington, VT 05405
Phone: (802) 656-4564/Fax: (802) 656-1423
Qingbin Wang, The University of Vermont, Burlington, VT
Elizabeth Trent, The University of Vermont, Burlington, VT
Robert Parsons, The University of Vermont, Burlington, VT
Table 1. Descriptive Statistics of the Vermont Small Business Retirement Survey Retirement Plan Yes (n = 479) No (n = 349) Continuous variables Mean S.D. (1) Mean S.D. Age 51.65 10.00 51.70 12.07 Planned retirement age 63.93 7.16 64.83 9.85 Age started work 18.80 6.68 18.47 8.42 Household size 2.57 1.13 2.51 1.13 Years in business 17.71 11.39 17.63 13.38 Categorical variables Count % Count % Gender Male 330 68.9 238 68.2 Female 149 31.1 111 31.8 Marital/partner status Single 80 16.7 85 24.4 Married 399 83.3 264 75.6 Education Less than high school 19 4.0 30 8.6 High school graduate 103 21.5 129 37.0 Post secondary 97 20.3 82 23.5 College graduate 102 21.3 54 15.5 Post graduate 158 33.0 54 15.5 Industry Agriculture 50 10.6 54 15.8 CMT2 96 20.4 63 18.5 Wholesale and retail 76 16.1 77 22.6 Services 111 23.6 89 26.1 P and F services (3) 138 29.3 58 17.0 Size of business 0-4 employees 412 86.0 317 90.8 5-19 employees 67 14.0 32 9.2 Interest in information (4) Debt management 82 17.2 108 30.9 Investment 152 31.7 123 35.2 Money management 138 28.8 126 36.1 Retirement 149 31.1 132 37.9 Retirement Plan Test Total (N = 828) Statistic Continuous variables Mean S.D. T-test Age 51.67 10.91 Planned retirement age 64.30 8.40 Age started work 18.66 7.46 Household size 2.55 1.13 Years in business 17.68 12.27 Categorical variables Count % Ch-square Gender Male 568 68.6 Female 260 31.4 Marital/partner status Single 165 19.9 Married 663 80.1 Education 53.33 Less than high school 49 5.9 High school graduate 232 28.0 Post secondary 179 21.6 College graduate 156 18.8 Post graduate 212 25.6 Industry 21.83 Agriculture 104 12.8 CMT2 159 19.6 Wholesale and retail 153 18.8 Services 200 24.6 P and F services (3) 196 24.1 Size of business 4.45 * 0-4 employees 729 88.0 5-19 employees 99 12.0 Interest in information (4) Debt management 190 22.9 21.67 *** Investment 275 33.2 Money management 264 31.9 4.95 * Retirement 281 34.0 (1) S.D. = Standard deviation. (2) Construction, manufacturing and transportation. (3) Professional and financial services. (4) The percentages are based on the number of respondents, not the number of responses. * p<.05, *** p<.001 Table 2. Retirement Plans of the Surveyed Small Business Owners Percentage of Percentage of Name of retirement plan Count 644 responses 463 respondents Individual retirement 303 47.1 65.4 account (IRA) SEP-IRA from present 136 21.1 29.4 position SEP-IRA from a former 24 3.7 5.2 position SIMPLE from present 58 9.0 12.5 position SIMPLE from former 5 0.8 1.1 position 401k or 403(b) from 46 7.1 9.9 present position 401k or 403(b) from a 45 7.0 9.7 former position Keogh plan from present 19 3.0 4.1 position Keogh plan from a former 8 1.2 1.7 position Total 644 100.0 139.0 Note: A total of 463 respondents have participated in at least one of the retirement plans. Table 3. Retirement Plans of the Respondents' Spouses or Partners Percentage of Percentage of Name of retirement plan Count 515 responses 370 respondents Individual retirement 225 43.7 60.8 account (IRA) SEP-IRA from present 43 8.3 11.6 position SEP-IRA from a former 10 1.9 2.7 position SIMPLE from present 32 6.2 8.6 position SIMPLE from former 6 1.2 1.6 position 401k or 403(b) from 144 28.0 38.9 present position 401k or 403(b) from a 41 8.0 11.1 former position Keogh plan from present 8 1.5 2.2 position Keogh plan from a former 6 1.2 1.6 position Total responses 515 100.0 139.1 Note: A total of 370 respondents indicated that their spouses or partners have participated in at least one of the retirement plans. Table 4. Preference Rating for Methods of Receiving Financial Management and Retirement Information (Rating scale: 1 = least preferred to 5 = most preferred) Mean Method rating S.D. (1) Median (2) Mode (3) Brochure 3.45 1.53 4.0 5.0 Direct mail 3.33 1.61 4.0 5.0 Magazine article 2.86 1.48 3.0 1.0 Internet web pages 2.30 1.46 2.0 1.0 Class at work 1.72 1.14 1.0 1.0 Class not at work 2.25 1.43 2.0 1.0 Individual session 2.93 1.65 3.0 1.0 (1) S.D. = Standard deviation of the rating (2) Median = 50% above and 50% below (3) Mode = Most frequently occurring Table 5. Retirement Plan Participation of Business Owners and Employer-Based Retirement Plan for Employees Retirement plan of business owners Yes No Total Count % Count % Count Employee retirement plan Yes 106 12.8 4 0.5 110 13.3 No 141 17.0 188 22.7 329 39.7 No employee 232 28.0 157 19.0 389 47.0 Total 479 57.8 349 42.2 828 100.0 Note: A Chi-square value of 97.75 indicates that whether a business offers an employer-based retirement plan to its employees is significantly related to whether the business owner has participated in at least one retirement plan. Table 6. Logit Regression Results (Y=1 indicates having a retirement plan and Y=0 otherwise) Variable Definition B Exp(B) Agri 1 for farm and agricultural -0.292 .747 business and 0 otherwise Small 1 for businesses with 1-4 -0.767 *** .464 employees and 0 otherwise Large 1 for businesses with more 0.061 * 1.063 than 9 employees and 0 otherwise ConcSS 1 if concerned about social 0.616 * 1.852 security and 0 otherwise Planprevjob 1 if has retirement from 2.765 *** 15.883 previous job and 0 otherwise Yrworked number of years the individual 0.004 1.004 has worked Married 1 for married and zero 0.246 1.279 otherwise Educ Level of education 0.395 *** 1.485 Children number of children under 18 -0.089 .915 Female 1 for female and 0 for male -0.21 .810 Spouseplan 1 if spouse has a retirement -0.054 ** .948 plan and 0 otherwise Workwork 1 if plan to work after -0.022 .978 retirement and 0 otherwise Constant -0.432 .650 * Significance at the 0.10 level ** Significance at the 0.05 level *** Significance at the 0.01 level Table 7. Logit Regression Results (Y=1 indicates interest in retirement information and Y=0 therwise) Variable Definition B Exp(B) Agri 1 for farm and agricultural 0.025 1.025 business and zero otherwise Small 1 for businesses with 1-4 -0.250 .779 employees and zero otherwise Large 1 for businesses with 10 or -0.330 .719 more employees and 0 otherwise ConcSS 1 if concerned about social -0.782 * .458 security and zero otherwise Planprevjob 1 if has retirement from -0.024 .976 previous job and zero otherwise Yrworked number of years the individual -0.019 *** .981 has worked Married 1 for married and zero -0.041 .960 otherwise Educ Level of education -0.122 * .885 Children number of children under 18 0.159 ** 1.173 Female 1 for female and zero for male -0.169 .845 Spouseplan 1 if spouse has a retirement 0.005 1.005 plan and zero otherwise Workwork 1 if plan to work after 0.076 1.079 retirement and zero otherwise Retplan 1 for respondent with a -0.286 * .751 retirement plan and zero otherwise Constant 0.681 1.977 * Significance at the 0.10 level ** Significance at the 0.05 level *** Significance at the 0.01 level…