Why The Retirement System Is Like The Cereal Aisle

I am interviewing Gaurav Sharma, who has launched a new venture to solve an old problem.

Gaurav, ever since we started our national experiment with do-it -yourself pensions with a bunch of tax favored accounts and plans we have had a system where workers are supposed to voluntarily saved in vehicles that remind me of the cereal aisle in a big American grocery store: Coco puffs (K), SEP Captain Crunch, ETF Bran Flakes.

I think one of the big failures of our system is that it is made for robots with spreadsheets. If you save 10% from the age of 25 and retire at 67 and get 3.5% real you’ll be fine. But real life doesn’t work that way. Thank goodness Social Security is one account, one number, one person!

1. How many kinds of accounts might a 65-year-old have today? Can you give me an example of someone?

 Too many! A 65-year-old today may have interacted with up to ten different 401k accounts throughout their working life. We know that most people who actively contribute in a retirement account do so through a workplace-plan, like a 401k – but we also know people change workplaces regularly. We now switch 401k accounts about as often as we switch smartphones. It’s not surprising then that many 65 year olds will have several 401k accounts tied to former employers, probably an IRA that they opened along the way, and maybe even a Roth IRA.

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 I won’t throw any of my 65-year-old family and friends under the bus, but we know many who fit in this bucket. And it’s through no fault of their own — the employer-oriented nature of our retirement savings system makes it hard to consolidate accounts as we move throughout our careers. 

 2. I couldn’t agree more, through in a random ESOP and a divorce and you have QUADRO’s on top of it all. These random accounts certainly seem to make it almost impossible to plan for retirement because you do not know where your accounts are or how much they are worth. How can you possibly really plan for retirement. What do you think?

 We think that’s absolutely true. It’s very common for people to quickly accumulate three or four 401k accounts tied to former employers – each of which will have different fees and investment options. There’s almost no chance that savings split up this way are being optimally allocated, especially when people forget about those legacy accounts and rarely check them. We think it’s far better to have assets in one place where fees can be monitored and investments can be coordinated. 

 3.   How difficult is decumulating retirement wealth for a typical American Worker if they have accounts scattered?

 Much more difficult than if their accounts were consolidated. Decumulation is hard enough as it is — how much of your assets to draw down, how to invest the remainder, whether to convert into an income vehicle, and how to stay emotionally balanced about it all. These are complicated questions. We think it’s much easier to answer them if your assets are in one place.

 4.   What is your company trying to do and how does it differ from the SARS act introduced this week in the House of Representative, whose provision is a clearinghouse?

 My new company, Capitalize is automating one of the most painful processes in finance – the dreaded 401k rollover. As you know, there’s no uniform way to roll over a 401k today. Each provider has its own process, and almost none are digital. It’s unsurprising then that so many people will leave their accounts behind or cash them out. 

5. Oh so it is only for 401(k) plans not all the other cereal boxes – KEOGH, FERS, TIAA, SEP, IRA, 4013(b)……

 Yep, it is only 401(k) rollovers. To solve the dreaded 401k rollover, my company built an intuitive, user-friendly experience that helps people handle their rollover online. We help people locate a missing 401k, compare and open a new IRA if they need one, and then we manage any of the administrative work to get their assets transferred. Almost all of this is done digitally but our users also get access to a top-tier support team of humans eager to help them. 

 I am supportive of legislative efforts to help solve retirement savings issues, including better ways to locate missing accounts. The more tools to help users consolidate their accounts the better.  

6.   How big is the scattered 401(k) account problem and who do you think you will help the most?

There are more than 15 million people who change jobs each year with a 401k. Of those people, almost 5 million will cash out close to $100 billion in assets. Another few million will leave their assets behind adding to the pile of “orphaned” 401ks which we think now numbers more than 25 million accounts. 

People who change jobs and leave behind orphaned accounts are put off by how cumbersome the rollover process is. We also need to help the almost 5 million Americans who roll over close to $500 billion of 401k assets into IRAs each year already.

Over time we’re keen to help reduce even more of the friction that’s embedded in our retirement savings system. We believe all Americans should retire with enough money for a life of dignity, and we’re excited to help make that happen.

7. So basically, you are telling me workers of all education levels and circumstances, gig workers, self – employed, workers on temporary assignment and regular full time workers are asked to stick money into an account depending on their circumstances.

People have the equivalent of a $20 dollar bill stuck under the underwear drawer, a $100 in a shoe book, and more under the mattress, maybe a $50 in a Coco puffs box.

And decumulating the funds in an efficient way is almost impossible when you have money randomly distributed through IRAS, 401(k)s SEPS or whatever.  We knew we had a problem, just a few years after ERISA passed reformers were calling for a clearinghouse of pension accounts. Good luck to your company trying to help just a few people find their lost 401(k).

I always thought the federal government should do more to help people find their accounts – the PBGC or Social Security could be a place to keep a record of accounts. After all the the government created this monster.

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