Capitalize – Why Prioritizing ‘Offboarding’ At Your Company is Critical During the Great Resignation with Gaurav Sharma

William Tincup:
Ladies and gentlemen, it’s William Tincup, and you’re listening to the RecruitingDaily Podcast. Today, we have Gaurav on from Capitalize. We’re going to be talking about why prioritizing offboarding at your company is critical during the great resignation. And that’s got many legs, and many different kind of storylines that we kind of want to explore, so Gaurav, would you do us a favor and introduce both yourself and Capitalize?

Gaurav Sharma:
Yeah, of course, William. Well, first of all, thank you for having me in, appreciate being able to chat with you on a topic that’s as timely as this one. So I’m Gaurav Sharma, I’m the founder and CEO here at Capitalize. Capitalize is a New York-based fintech company. We’re a venture capital backed fintech. So we’ve raised about 15 million dollars from some great investors across the country. And the problem that we are solving is helping Americans save for retirement, which is obviously a big overarching challenge that we as a society and individuals face, but more specifically, the pain point that we’re focused on is helping individuals find and consolidate or roll over their legacy retirement accounts.

Gaurav Sharma:
So I think as we all know, the main way Americans save for retirement today is through a workplace plan like a 401k. There are some really good things about that, right? The money comes out of our paychecks. It’s a tax efficient way of saving. And so that’s all well and good.

Gaurav Sharma:
The problem though, is that we change jobs every three or four years. And right now it feels like people are changing jobs every three or four months. And so every time we change jobs, we have to figure out, hey, what do I do with the money that I’ve saved inside of that 401k? And how do I go and interact with a brand new 401k at a new employer, should I be so lucky to get one? And unfortunately what we found is that most people will either leave their money behind for some extended period of time, or they’ll cash it out prematurely. And the reason they do that is the process of actually transferring 401ks is a very cumbersome, outdated manual procedure that’s known as the rollover. And so that is the pain point that we at Capitalize are fixing. We are digitizing the way people find their old 401ks, if they’ve misplaced them, and actually transfer them when they change jobs to a new retirement account that’s right for them. So that’s what we’re doing.

William Tincup:
I love that. And again, we’re going to be talking about offboarding, and kind of the great resignation. People are moving. And again, the company’s goal is obviously help people save for retirement. They don’t get to a place where they’re retired and not have something there. So let’s talk a little bit about the offboarding process, the way it’s kind currently done, and the way that we should be thinking about offboarding.

Gaurav Sharma:
Yeah, yeah. Look, I mean, I think one of the challenges is that historically companies and employers have focused much more on the onboarding process than the offboarding process, which, look, in theory it makes sense, right? You’re bringing someone on, you want to make sure that they are set up for success. You invest a lot of time in that process. And so that has typically require or gotten most of the attention.

Gaurav Sharma:
Offboarding has historically gotten far less attention, because someone’s leaving you, and the incentive or the ability to invest time and effort there, may not be as great as it is for someone who’s joining. That is starting to change because employers are realizing the importance of offboarding, which we’ll kind of get into, but typically it’s been much less of a streamlined process. It usually involves getting a whole bunch of paperwork, from HR and benefits, full of legalese. It’s really hard to comprehend. And I think that’s why you’ve seen some of these dynamics where people are confused, and end up doing the wrong thing with their retirement accounts, or their health benefits at the point of job change, is because there hasn’t been a streamlined focused effort around offboarding. Although, thankfully, we’re starting to see that change.

William Tincup:
So it’s interesting because it’s so inefficient for employees, it’s almost easier just to walk away and forget it because, hey, you got a new job, or let’s say you parted because maybe they let you go, you’re now in an emotional state. You’re not really thinking about those things. So when y’all are talking to what are now former employees, alumnus, what questions should they be asking? And like, what’s their arsenal of questions that they should be going to HR, whether or not it’s voluntary, involuntary. Let’s just say that there’s a parting of ways, one way or another. What are the questions that we should arm them with about this specific thing, about going forward? What does this look like? How do I get there, et cetera?

Gaurav Sharma:
Yep. Yep. I think it’s a really good question. Look, I think the first thing we should be asking is, who is the point person on my retirement benefit questions, or my healthcare questions? Who is the person that’s most knowledgeable that can actually help me get that done? And sometimes it might be the HR contact, or sometimes it might be somebody at another institution, but kind of getting clear on who that is at the point of job change is really important.

Gaurav Sharma:
I think the second thing is asking, okay, are there any deadlines that are relevant to me, and being crystal clear on those. So in the 401k space, one of the deadlines is that… Or one of the things that can happen is if you don’t do anything with your 401k, and it’s under $5,000, it can actually be subject to what’s known as a forced rollover, where it will be moved into an account at an institution that is not of your choice, right? And so understanding, hey, is this something that could happen to me? And if so, when do I have to decide by, is a really good question to ask, just like, what are my deadlines? When do I need to make decisions by?

Gaurav Sharma:
And then I think having a really plain simple English conversation around what are my options, right? Like, can I leave this behind in your 401k plan? Can I take it out? Can I roll it over? I think those are three key questions. I think one of the things we’ve noticed though, is that it actually imposes a pretty significant burden on the HR benefits person, right? So the HR benefits person is now actually charged with helping somebody think through their options with the 401k. And again, that’s another part of the problem that we’re trying to solve by helping folks at the point of offboarding, we can try to make it better for the exiting employee, but we can also make the life of that very busy HR and benefits person much, much easier.

William Tincup:
So the money doesn’t go back to the company. Let’s just kind of debunk some things, the money, if you’ve put money into a 401k, maybe they’ve matched it or whatever, the company doesn’t get it back. So that’s not a thing, but it can be left dormant somewhere, or placed in a different… You know, forced into an account that maybe you don’t have access to, or you don’t know that’s there, et cetera. How do they go… So first of all, if anyone’s listening to this, your 401k is safe.

Gaurav Sharma:
Yes, that’s right. That’s right. No alarms, no panic.

William Tincup:
No, no alarms, no panic, but to find it, and then to be able to move it into a place that they… That you manage and that you have control over, et cetera, how do they go about that process? How do they find out, okay, five years ago I worked at company X, and good, gosh, I’ve forgotten all the people, they’ve forgotten me. What’s that process of recovery?

Gaurav Sharma:
Yeah. Look, the first thing I’d say is, if you are in that bucket, you’re in good company. We actually did some research earlier this year with the Center of Retirement Research at Boston College, where we estimated that there are 24 million left behind or forgotten 401ks in the U.S. with 1.35 trillion dollars of assets. So these are 401ks, as you describe them, are dormant. They’re still there. The money’s still there, but we may have lost track of them. Or we may even know where they are, as in which financial institution has the money, but we may have lost track of what fees we’re paying, and what that money’s invested in. So you’re in good company, and, candidly, part of the reason we set out to start this company is that this was a pain point that my co-founder and I, and others, had experienced ourselves. So we know what it’s like, it’s the path of least resistance. There’s no judgment there. It happens to a lot of us, right? And so… Sorry, go on.

William Tincup:
No, no, no, no. Finish your thought.

Gaurav Sharma:
Yeah. So look, I mean, I think that’s kind of number one, you’re in good company, number two, how do you go about sort of reclaiming it, or getting it back. And there’s a few ways to do it. I mean, we built the company as a way to solve this very problem. And so we’ve actually built an online experience where a user can come in and just type in the name of their former employer. And there is a very, very high degree of probability that we know where that money is. So we’ve built a database where we’ve kind of aggregated, okay, for all the employers in the U.S, which 401k providers or record keepers do they use. And so we kind of know based on the name of your former employer, where your money is likely to be, and so that’s kind of something that we help folks with.

Gaurav Sharma:
The other way you can do it, is you can try to reach out to your former HR person, right? And say, okay, let me kind of dig through and figure out who might be there now. That’s obviously a lot more challenging, but that’s a way to go. And then the last thing I point out is that Congress is conscious of this problem. There’s been legislation, proposed legislation, to create a national database of lost and found accounts, which hasn’t gotten up yet, but we all know it’s problem. And so at some point there may be a government solution, but interim, people are free to come to our website, actually, and use the platform. We’ll help them find the account.

William Tincup:
So cashing out, if they go that route, and they leave, and it’s just like, okay, cash out, or they leave, and again, kind of lose it, and not lose it, but just lose track of it. What have you seen in terms of tax implications for folks, because that would be a question I think all former employees would ask of themselves, if they cash out, what does that look like? And then if they leave it somewhere and it’s accruing interest and they haven’t touched it, et cetera, are they claiming it as assets, et cetera.

Gaurav Sharma:
Yeah. Yeah. So it’s a good question. So look, if you cash out, means you’re saying, okay, look, I want to withdraw this money now. And typically, if it’s been in a traditional 401k, which means that the money has gone in pre-tax, that’s about 85% of 401k accounts, then you’ll be liable, you’ll have to pay taxes and penalties on the money. So you generally pay income tax on the withdrawal. And then if you’re under retirement age, the IRS will levy an additional 10% sort of penalty. And the reason they do that is that they’re trying to discourage people from doing it. You know, the reality is that there are people who need that money. And so if you have a financial or medical emergency and you’ve saved money in a 401k and this is your option, you should absolutely access that, and withdraw it if you have no other source of financing.

Gaurav Sharma:
So clearly a subset… There’s about five million people who will do this each year in a normal market, they’ll withdraw, and a subset of them, about 35% of them will do so just because they have an emergency, which is totally reasonable. The folks who then leave their money behind, there’s about three million of them each year. And again, that’s 24 million of forgotten 401ks in total now, but three million people each year.

Gaurav Sharma:
And so what are the consequences of doing that? So first of all, as you pointed out, the money is still yours, right? Like it doesn’t go back to the employer. Most of the money inside of 401ks is contributions that have come out of your paycheck as an individual, and then sometimes an employer will match. And so that money goes into the 401k. Sometimes the matching is dependent on you being there for a certain amount of time, but let’s assume that all that money is in there, and it’s yours.

Gaurav Sharma:
To your point, it’s not going to disappear, but it can be moved, but let’s assume that it’s still sitting inside of that old 401k. The implications of that are, I think, twofold, right? One is, you may have lost track of the fees. And so most 401k accounts have fees in them. And some of them are pretty low, right? There are some great 401k accounts, and 401k plans out there, where the fees are very reasonable. And so you’re okay. There are unfortunately still a lot of 401k plans and providers where the fees are pretty high.

Gaurav Sharma:
And so, one of the things you just want to be conscious of is, okay, if I’m leaving my money behind, let me feel good that the fees I’m being charged in that 401k are not egregious, that they’re reasonable. The second thing you kind of want to make sure of is that the money is allocated in the right kinds of investments, right? So what you don’t want to have is that the money is sitting in cash or like a very low return investment, like a money market mutual fund. With interest rates where they are today, pretty low, sitting in cash or a really secure cash-like investment, like a money market mutual fund, won’t make you much of a return. It will mean that the money doesn’t fluctuate, it’s stable, but these are long-term retirement assets where you kind of want to be invested in a mix of stocks and bonds and things that will actually grow over time.

Gaurav Sharma:
So the two things you really want to be focused on are, okay, are my fees reasonable, and are my investments inside of this account also appropriate for me. And that’s the risk, honestly, of leaving money behind for an extended period of time, it’s that we kind of lose track of those two things. And those two things can have an impact that’s pretty substantial on our retirement savings. And so, yep. It’s worth keeping that in mind.

William Tincup:
So all 401ks aren’t built the same. You kind of mentioned that in the last thing. What are some of the trends that you’re seeing that employees, both former and current, should be thinking about when they’re looking at and choosing 401ks?

Gaurav Sharma:
Yeah. So the 401k is a benefit that’s tied to the employer. And so your employer is in charge of selecting the 401k administrator, right? Whether it’s Fidelity, or ADP, or Paychex, or Vanguard, or whoever it is. So when you go to a company you’re kind of forced to use whoever the 401k provider is. You don’t really have a choice. Similarly, your employer has worked with that 401k administrator to select the investment options within the plan. And so hopefully it’s a good set of low cost options, and you have some choice, but you’re sort of dependent on the employer. And so you are, as an employee, a little bit beholden to the choices that the employer has made with respect to those two things.

Gaurav Sharma:
One of the things to be conscious of I think, most of the industry… Most 401k plans have done a good job, over time, of making sure that… Or they’re getting better over time, making sure that there are good low cost ETFs and index funds for people to choose from within that plan. So I think that is something that we have seen inside of 401ks.

Gaurav Sharma:
The big advantage of rolling over into an IRA when you leave, so an IRA being an individual retirement account, is that you then control that decision, right? So when you’ve left your former employer, you do not have to leave the money inside of their 401k, wherever it is. You can actually roll it into a retirement account, an individual retirement account, at an institution of your choice. You know, whether that is Schwab, or E-TRADE, or Betterment, or Wealthfront, one of the newer providers. And that can expand the pool of things that you can invest in, right? You’ll have a lot more control, if that’s what you want. So if you want access to things like ESG investments, if you want access to alternative investments in crypto, not to say that everyone should be doing that, that’s the sort of thing that you can get, in addition to obviously good portfolios that are managed for you. And so that, I think, is one of the differences, one of the trends to be aware of.

William Tincup:
So dumb question alert, but the way that you explain the 401ks, it’s, historically, it’s everything that I’ve experienced. You go into a company, they have a 401k, it’s kind set up, whatever the matching is, or isn’t, it’s set up for you. Do you foresee, because talent’s changing and working differently, not just remotely, hybrid workplaces, hybrid workforces, gig workers, all of that types of contingent work, do you see, at one point, the 401k not being tethered to the company, but just being tethered to the individual, and it just moving with them?

Gaurav Sharma:
It’s a very, very good question. And I think if you and I were designing the system today, from first principles, if we got on a whiteboard, right, we would probably propose a system or a model that looks just like that, right, where the account is tied to the individual rather than being tied to the employer.

Gaurav Sharma:
Now, I think it’s very hard to get there because of the regulatory landscape, and because 401ks are so embedded now in the system, right? But what I think we do need to do is we need to make it easier for people to transfer their money, so it feels like they’re taking it with them, right? They have one portable account. And if we do that, then we can sort of simulate that feeling of, hey, it’s my money, it’s my account, and it’s kind of coming with me. Because the rollover process, or the transfer process, has been so old school and ossified, it has felt like, okay, my money’s sort of very much tied to this old employer. And I go from job to job and I accumulate all of these 401ks. And we actually make the process of moving and managing and seeing your money easier across jobs. And we kind of get to a version of, I think, what you’re proposing.

William Tincup:
Without naming names, of course, what’s the most 401ks that you’ve seen someone accumulate, that they’ve had to put… Wonderfully, that they put together into one.

Gaurav Sharma:
Yeah. Yeah. We’ve seen a lot, I think we’ve seen as many as seven 401ks that we’ve rolled over. And look, you do the math, right, if you start your career… If you think about it, right, like let’s say you’re starting your career at, call it 22, and you’re going to work till 65, right. So call it 40, 45 years in the workplace. And if you change jobs every three or four years, you could have 10 to 15 jobs. And let’s say that 70% of them have 401ks, and you use them. That’s how you can accumulate seven to ten 401ks during the course of your working life. So it’s a big number, but it’s also easy to see, when you think about how many times we change jobs.

Gaurav Sharma:
And I think it… Look, it ties to the theme that you opened with, right, which is what’s the impact of the great resignation on all of this. And I think it just is exacerbating the problem. It’s making it… It’s really exposing it. As people go from job to job at a higher velocity, the amount of time that they spend with one 401k or with one benefits platform is just shorter and shorter. And so there’s more transition points. There’s more opportunity to… It’s kind of more of a need to figure out how do I do this efficiently?

William Tincup:
It’s interesting because in my mind, and especially in the state of Texas, there’s a place you can go to, to find money that’s owed to you from just different places, right?

Gaurav Sharma:
Yeah.

William Tincup:
And it’s amazing because every time I search it, like every other year or whatever, I mean, it’s not a lot of money, but there’s little bits of money from places I would’ve never thought of. And it’s like unclaimed furniture.

William Tincup:
So we’ve given advice for candidates and employees when they’re leaving, questions that they should ask, be more sophisticated in understanding kind of, even if it’s an arcane process, how they can kind of have a better control, have better access, understand the process better. Let’s flip that onto the HR and the folks that are helping that transition. If you were doing the wipe off board, how would you advise them on what they should do while these folks are going through the resignation, especially as it relates back to the 401k? What should they be doing?

Gaurav Sharma:
Yeah. Yeah. Look, I think it comes back to why should employers and HR folks care about the offboarding process, and helping people with the offboarding process? We think there’s a few reasons, particularly as it relates to the 401k, right? I think the first is, it’s just the right thing to do. You know, if you have a 401k plan at your company, you clearly care about helping your employees save for retirement. And that’s a phenomenal thing. What you don’t want to see as an employer or an HR or a benefits person is that that employee squanders all of the hard work by making a bad decision at the point of job change, right, by cashing it out, because they didn’t know their options, or letting it be subject to a forced rollover or sort of leaving it behind and forgetting about it.

Gaurav Sharma:
So what they should do is, obviously again, help make sure the person knows what their options are because it’s the right thing to do. And it helps reinforce the value of the plan. The second thing is, it’s also good for the employer to often show this support at the point of offboarding, right? Because, I think, because the labor market is so tight right now, taking care of people on the way out, word gets around, right. And people write Glassdoor reviews, for example, about their experience at a company. And if you help them leave in a really nice, positive way, I think it helps, from an employer branding point of view, and that then helps you hire more people, right? If you’re like, hey, [inaudible 00:25:28] and retain, because your existing employees will see how you treat people, not only on the way in, but also on the way out. And that’s a really powerful signal to new hires and to folks who are on the team. So I think it’s good for the employer from that perspective.

Gaurav Sharma:
Now the last point is, we actually think, in particular… So this problem that we’ve been talking about are forgotten 401ks, right? Where we leave our money behind, we think that’s actually not only not great for the individual, but it’s also a burden on the employer, right? Why is that the case? Well, it’s because the employer has to pay money to the 401k administrator to maintain the 401k plan. And most of that money, most of those fees, are actually charged on a per account basis.

Gaurav Sharma:
So if William or Gaurav leaves their former employer, but we forget about [inaudible 00:26:27] there, our former employer is actually paying fees for us to maintain that account there, right, even though we no longer work there. And so not only is it the right thing to do to help the individual kind of make an informed decision and roll it over if that’s what they want into an account, a new account, but it’s also kind of good for the employer who then won’t have to pay those fees and won’t be subject to ERISA fiduciary obligations. And so employers should never push an employee to do one thing or another at that point in job change, but there is a burden on the employer that comes with this forgotten 401k phenomenon. And again, that’s something that we care about a lot. We focus on a lot, how can we help the employer, at Capitalize, as well as the individual.

William Tincup:
I love that you touched on the employer brand part and Glassdoor, because this is an extension of the employee experience. This is the end of that experience, again, voluntary or involuntary, doesn’t really matter. This is the end of that experience, but it can be a good experience. We haven’t talked about it explicitly, but the boomerang, people leave, but if they have a good experience, there might be a chance of them referring other people, or potentially coming back and working again at the firm. So brother, this has been a wonderful, wonderful podcast. Thank you so much for coming on today.

Gaurav Sharma:
Course. Hey, William, thanks for having me, and happy to be here.

William Tincup:
Absolutely. And thanks for everyone that listens to the RecruitingDaily Podcast, until next time.