Shoring up retirement readiness will renew the American Dream

When the U.S. Continental Congress ratified the Declaration of Independence 250 years ago on July 4, 1776, a unique nation was seeded in the annals of history — a republic by the people, for the people. Thomas Jefferson memorably penned that these unalienable rights included "life, liberty and the pursuit of happiness." 

In the minds of many, the pursuit of happiness involves what became known as the American Dream. As our parents, grandparents and teachers told us growing up, if you worked hard and followed the rules, you could rise from employee to employer and achieve the financial independence to own a home, raise a family and become a vital member of your community. The American Dream was possible, we were told, because America is a true meritocracy. 

The American Dream also encompasses a financially secure retirement wherein you and your spouse can enjoy your golden years doing new and interesting things that might have been out-of-reach during your working years.

Over the past 50 years, new dynamics have entered the picture — the combination of a more mobile American workforce and lack of infrastructure to meet needs for mobile retirement savings. These dynamics have created a retirement savings gap for many workers. The average American today will hold about 10 jobs during a 40-year working life, according to the Employee Benefit Research Institute (EBRI). Simultaneously, EBRI estimates that $92 billion "leaks out" of the U.S. retirement system every year, primarily due to premature cash-outs of 401(k) savings accounts by plan participants after they switch jobs. 

Historically, the process of moving 401(k) savings from one plan to another at the point of job-change has been cumbersome, manual and expensive. For too many plan participants, the easiest options are prematurely cashing out their 401(k) accounts after switching employers or leaving them behind in their prior-employer plans. 

While the sum of a small 401(k) account may seem trivial at the time it is cashed out, the plan participant is forfeiting so much more in compounded retirement income which that balance could have achieved, were it preserved in the retirement system. 

According to our calculations at Retirement Clearinghouse, if a 25-year-old plan participant preserves just one 401(k) account with $7,000 today instead of cashing it out, he or she would increase retirement savings by $86,912. 

Preserving three 401(k) accounts with $7,000 each during a participant's working life would lead to an extra $157,878 in retirement savings. 

Reframing financial literacy

When we talk about financial literacy, people often think about the obvious, visible starting points such as debt management, budgeting, personal finance or the basics of investing. However, while these are important subjects for workers to learn about, one of the overlooked aspects of true financial literacy is the understanding of what it takes to preserve savings – and especially retirement savings — after they have been earned and saved. 

Preservation is more than just an outcome or a single decision — it is an ongoing behavior, a set of decisions reflecting discipline and knowledge. Truly financially literate individuals don't only save — they keep those savings intact and grow them, across market volatility, job changes and life's disruptions. 

EBRI estimates that nationwide, our retirement system loses $92 billion annually — the consequence of what happens when preservation fails. We as an industry can do so much to encourage more people to achieve the American Dream and improve workers' lives before and after retirement, by emphasizing the importance of 401(k) savings preservation. The financial wellness programs offered by plan sponsors and recordkeepers are a good starting point for spreading the message that preserving 401(k) accounts instead of cashing them out can significantly increase retirement savings. 

Tools for enabling preservation

Together with partners in Congress and at the U.S. Department of Labor, we were able to develop the auto portability-enabling regulation and technology-based solution for simplifying plan-to-plan transfers of 401(k) savings at the point of job-change. The result: a digital, automatic and standardized transfer of a participant's account when he or she changes jobs, with consolidation of those savings into a participant's active account in their current employer's plan. 

According to our Auto Portability Simulation, were auto portability to be adopted by plan sponsors across the country over a 40-year period, it would likely generate an additional $1.6 trillion in net incremental retirement savings for 175.6 million Americans. 

That's quite a lot of extra retirement savings that can help hardworking Americans improve life and pursue happiness. 

Another Founding Father, Benjamin Franklin, famously wrote in The Way to Wealth (1758), "If you would be wealthy, think of saving, as well as of getting." In other words, making money is only half the battle to a secure retirement — saving money is the other half. 

As our country celebrates its 250th birthday on Saturday, let us as an industry renew our commitment to helping Americans preserve their retirement savings in order to increase the income they can enjoy after retiring.