The Influence of Positive Psychological Factors on Small Business Owners' Retirement Planning Activities
McCullough, Jill B., Financial Services Review
This analysis studies the influence of certain behavioral characteristics on small business owners' retirement planning preparation. In the proposed model, an owner's retirement goal clarity is hypothesized to mediate the relationship between the level of his retirement planning activities and three behavioral factors: engagement, satisfaction, and future time perspective. Survey responses from business owners were analyzed using structural equation modeling. Results suggest that owners who are engaged by their businesses and have a "live for today" attitude are less motivated to plan for retirement. A sense of satisfaction with the business, however, shows positive influences on retirement planning motivation. © 2012 Academy of Financial Services. All rights reserved.
JEL classification: J26; D81; M52
Keywords: Behavioral finance; Retirement planning; Small business owners; Satisfaction; Engagement
Nearly 50% of United States small business owners, employing approximately 19.5 million employees, do not offer retirement plans for the benefit of themselves and their employees (Copeland, 2009). Employees of companies in which no plan is offered are denied an automatic savings tool via automatic payroll deductions. Rather, they are personally responsible for initiating their own retirement planning solutions. However, most workers will not save for retirement without an automatic process in place (Banks, 2008). Fewer than half of U.S. workers have even tried to calculate how much savings they will require for retirement needs (Meredith, 2008). As these millions of individuals reach retirement age, their unfunded income needs could have perilous national economic impact. A better understanding of the factors that motivate small business owners to adopt retirement plans could aid in encouraging more plan sponsorship, thereby boosting overall national retirement savings.
The majority (73%) of small businesses are sole proprietorships (Small Business Administration, 2009) for which the plan adoption decision is generally made by the business owner. The likelihood of plan sponsorship increases with the number employed in the business. The percentage of workers participating in a plan ranges from 14% for businesses with fewer than 10 employees to 57% for workers at firms with 1,000 or more employees as illustrated in Fig. 1.
Currently, the most common plan type used is a defined contribution plan; typically a 401(k) plan. Under a defined contri-bution plan, an employee contributes a portion of her wages to an individual account within the plan. At retirement, the worker gets the accumulated contributions plus accumulated investment income or loss as a lump sum (Munnell and Sass, 2006). The only direct costs to the small business owner result from the implementation and servicing of the retirement plan, as well as any voluntary matching employee dollars offered, typically 2% to 6% of wages. Fees, such as commissions, are generally assessed against the employee's plan balance. The cost to the small business owner is relatively low, especially in comparison to the cost of other employee benefits like medical insurance (Crimmel, 2009).
A small business owner should have a self interest in adoption of a retirement plan so that, like his employees, he will be able to enjoy tax-deferred retirement saving. Under ERISA (employee retirement insurance savings act) guidelines, any plan used by the owner must also include the employees. If an owner wishes to establish a qualified retirement plan for his own benefit, approximately 80% of the company's fulltime employees must participate as well. Therefore, there is direct incentive to the owner to establish a plan.
If the cost of offering a retirement plan is modest and adoption of a plan provides the owner with an attractive tax savings device, there may be other, non-economic factors influencing so many owners in not offering a plan. …