Capitalize inks 'deep, multi-year' deals with Schwab, Betterment and Robinhood to mine 401(k) assets, and $19 million VC round follows

Capitalize Money's startup vision in 2020 seemed too "no-duh" to be true, but $19 million in fresh capital – and Schwab, Betterment and Robinhood using its product – are rocking the “rollover” company. 

“They’re using our solution much in the way firms work with Plaid. They’re embedding our API in their existing platform,” says Capitalize co-founder and CEO Gaurav Sharma.

“We're leading in technology. We have a lot of room to move the industry to more digital solutions, and in order to do that, we need to grow the product and engineering team,” he adds. 

Capitalize, which has grown from 10 employees to a staff of 45, moved maybe $10 million in retirement assets early on. Now that number reaches into the multi-billions of dollars, annually. 

RRE Ventures, the New York City VC firm -- with hits like NerdWallet and Datadog in its portfolio -- led the round, according to the Aug. 14 announcement. 

Clear progress

RRE was impressed by Capitalize's ability to show that a financial industry bottleneck can be the basis of a profitable business model. 

The Capitalize progress is clear enough to … capitalize, after a four-year observation period, said RRE Ventures General Partner Raju Rishi in a release. 

Existing funders Canapi Ventures and Bling Capital also invested more, bringing total funding to $33.5 million since founding.

“We’ve known Gaurav and the Capitalize team since 2020, and have been incredibly impressed by the thoughtful, systematic approach they’ve taken to building a great company … to bring retirement account transfers into the digital age," Rishi said. 

API breakthrough

Investor inertia, legacy recordkeeper computer systems and broker-dealers that don't talk to each other have caused 29 million Americans to leave behind over $1.65 trillion in former employer 401(k) plans. See: Capitalize gets $2 million from four top VCs on novel freemium idea -- to reunite investors with hundreds of billions in 401(k) assets held by their ex-employer

The breakthrough was to develop a Capitalize API that it can embed onto a firm’s existing platform to make it easier for investors to set up a rollover.  

This solution sounds great for “digital” companies, though maybe less for the legacy companies where so many assets get hung up, says Lex Sokolin, a fintech analyst.

“It sounds like a perfect fit for digitally native footprints, like roboadvisors and neobanks, and likely more difficult for firms that have legacy technology platforms," he says.

"It will be most important for someone who is building a new asset base quickly, rather than someone who has to unplug their old solution and get a new one.”  

Indeed, Betterment, M1 Finance, Robinhood, and SoFi are among the more prominent Capitalize partners. Capitalize doesn't disclose its API partners.

“The product in this case is API-first, which means that the customers — financial firms — have to be nimble enough to integrate the solution into their stack," Sokolin says.

Though, Sharma says the firm has built the API solution so it is easy and straightforward for firms to use and Capitalize provides support along the way.

Generating revenue

Capitalize generates revenue from these partnerships because the financial firms pay Capitalize transaction fees for funding and executing the rollovers.  Sharma declined to specify prices.

The second way that Capitalize earns revenue is through users who reach out to the company directly. 

It selects an IRA rollover partner and the partner pays a referral fee. Sharma declined to disclose the referral fees his company receives. 

Sharma emphasizes Capitalize is not a lead-generation business. 

“We’re acting as a funding mechanism,” he says. “We’re not just handing you off. We’re helping the user to open that account. We’re an administrative provider.” 

Fiduciary acts

These humble beginnings for Capitalize seem like they might blossom if the Department of Labor (DOL) makes 401(k) rollover execution into an aspect of a fiduciary process, says Louis Harvey, founder of Dalbar Inc. See: Capitalize sees opening to serve RIAs with 401(k) rollover services on heels of DOL fiduciary rule and scores $12.5M from VC firms to make it happen 

“It looks like a long haul, but the odds are that rollover advice will eventually be recognized as fiduciary acts,” Harvey says. 

If this happens, RIAs would be required to establish fiduciary practices and document an explicit rollover recommendation, he says.  

"Capitalize… could be on to something big if their focus was to enable RIAs to meet the regulatory requirements. The main problem is not one of labor intensiveness, it is the requirement to act in the participant’s best interest. 

“This translates to a disciplined, consistent and repeatable process. In other words, the RIA must make recommendations that will stand up in court… not simply manage paperwork.”

Harvey adds: "It seems to me that Capitalize as a non-fiduciary can facilitate information management, but what RIAs really need for rollovers is decision management, and that is fiduciary. 

“It is the fiduciary that must answer the pivotal participant question, ‘All things considered, what should I do?’”

Addressing advisors

Capitalize doesn't provide advice and isn't a fiduciary, Sharma says. He is interested in working more closely with RIAs, but would not offer specifics. 

 “We’re very excited to support RIAs, and part of what we’re doing with the proceeds is we’re looking at ways to specifically support advisors. We know advisors have specific needs," Sharma says.

The first iteration at Capitalize did not contemplate servicing RIAs, but that has changed in a big way.

“Working with RIAs is a big priority to us post-raise, as our business has shifted more to an embedded experience. This has made RIAs a more obvious segment of the market," he says. 

The $19 million raised will be used in large part to deepen its partnerships. 

“These are deep, multi-year, long-lasting partnerships,” he says. “Our business really depends on our relationships and working with retirement account providers and IRA providers. 

"That’s part of their value proposition. We’ll help users find and transfer these accounts to their businesses. ”

Fidelity's big foot

Notable, for now, is that Fidelity Investments -- with 30 million plan participants and $3 trillion of defined contribution assets -- is not a Capitalize client, perhaps because it's already good at routing rollover internally.

“Historically, large recordkeepers like Fidelity had a huge edge in this area as evidenced by their 40%+ rollover capture over various periods," says Mike Alfred, who founded Brightscope, a 401(k) fee-tracking company. 

“But perhaps the game is changing, if respected VCs like RRE are seeing enough momentum to lead a round of this size,” he adds, via email.   

Fidelity launched a plan in 2020 that makes it more convenient for investors to stay in their old 401(k) plans. See: Fidelity Investments rewrites the 401(k) rollover script by allowing plan participants -- with a small catch -- to skip the IRA and have the plan sponsor hold the account post-employment

A Fidelity spokesperson said the company wants innovative ways to expand customer relationships but declined to comment about Capitalize.

When asked about Fidelity, Sharma says he is open to working with all firms, and Capitalize hasn't disclosed all of its partner firms. 

Orphans rising

About 10 million accounts are transferred annually - totaling about $1 trillion in retirement assets, according to Capitalize, which conducted the study with  Center for Retirement Research. The analysis shows there are still 29 million left-behind and forgotten 401(k) plans totaling $1.65 trillion. 

The number of forgotten or orphaned 401(k) plans continues to rise, particularly in recent years, with people moving jobs at a high rate from COVID, Sharma says. 

Assets in individual retirement accounts IRAs - total $14.3 trillion at the end of the first quarter, up 5.5% from the fourth quarter of 2023. 

Americans held $11.1 trillion in defined contribution plans at the end of the first quarter of 2024, according to the Investment Company Institute.  

As of March 31, Americans held $11.1 trillion in defined contribution (DC) retirement plans sponsored by employers, up 5.3% from the first quarter of 2023.