It took me a while to get back to this, but you figured it out already - You’re doing a round-over of a pocket, so you need to be on the inside of the profile to round it over. The example file you sent me that works (with a simple rectangle pocket) is set to inside as well, which is why it works.
You are clearing material away from the letters - The letters are what’s left over after a pocket. Because you are rounding the big rectangle pocket, as well as the letters it contains, you’re rounding the “inside” of the pocket. If you had only selected the letters, it would be the “outside” of them.