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EP267 · Economy · first published 2024-08-21

A 401(k) for Finland | Catherine Reilly | Negotiator 267

MP Tere Sammallahti got funded pensions into the National Coalition Party's programme, and Catherine Reilly — who designed 401(k) products at State Street Global Advisors — explains how the American defined contribution system actually works: 401(k), IRA, automatic enrolment, target date funds and annuities. Set against it is Finland's defined benefit model, in which a 24.4 percent contribution accrues not one euro of capital to the individual and nothing to inherit — while the US federal estate tax threshold is 13 million dollars and Finland's is 20,000 euros. At the centre is Miettinen's concrete proposal: 2.4 percentage points of the contribution into a personal funded pension, 22.0 into the existing system. The author regards funded pensions as excellent and holds both models himself.

Sami Miettinen · Sections: AI and the Economy

A 401(k) for Finland | Catherine Reilly | Negotiator 267

Summary: MP Tere Sammallahti secured a commitment to pursue funded pensions in the National Coalition Party’s programme. Catherine Reilly — Sami Miettinen’s classmate from the Helsinki School of Economics, later chief economist at OP-Pohjola’s asset management, then via Harvard to State Street Global Advisors and there to designing 401(k) systems — explains how the American defined contribution pension actually works.

Set against it is Finland’s defined benefit model, in which a 24.4 percent contribution accrues not one euro of capital to the individual and nothing to inherit. And so that the proportions are clear: the US federal estate tax threshold is 13 million dollars, Finland’s is 20,000 euros — and there, funded pensions are inheritable.

The author’s position and disclosure. I regard funded pensions as an excellent system, and this is not offered as a neutral survey. I hold both models myself: a funded pension from the United Kingdom, which I have run at an aggressive equity weighting, and TyEL and YEL from Finland. That is also why the comparison here is concrete rather than theoretical — I have paid into both and seen what each accrues. Nothing in the episode is investment advice.

The guest

Catherine Reilly has an English father and a Finnish mother, moved to Finland at fourteen and was not initially pleased about it. After matriculating she went to Spain to read law, did it for a year, concluded the idea was foolish and returned to the Helsinki School of Economics — onto the same course as Miettinen, where a shared business game stuck in both their memories mainly because both were swots.

Her career ran from McKinsey into finance: OP’s and Pohjola’s asset management, where she served as chief economist. Following her husband’s Harvard MBA she went to Harvard herself, stretched the degree to two years and stayed in the United States from 2013. There, State Street Global Advisors — one of the world’s largest asset managers and oldest banks, which in Reilly’s words almost nobody except professionals in the field has heard of — and there specifically defined contribution, that is, the 401(k). Later the British fintech Smart, which offers low-cost, technology-driven pension savings systems for small employers under the name Smart Pension.

Two worlds: defined benefit and defined contribution

The frame for the whole conversation is one pair of concepts, and it is worth opening straight away.

Defined contribution means your pension depends on how much has been paid in and how it has performed. The American 401(k) is this.

Defined benefit means your pension is tied to some entitlement — typically a salary. Finland’s earnings-related pension is this. Reilly’s description is apt: it is rather like a compulsory investment fund that you are locked into until you reach retirement age.

The difference is not technical but proprietary, and the episode returns to it again and again.

The three American layers

Social Security — a pay-as-you-go floor

Reilly’s first observation surprises many: the American basic pension is structurally very similar to the Finnish earnings-related pension. It is not funded in any way but a pure pay as you go system, in which contributions cover the pensions being paid at the same time. It is close to compulsory for all workers.

The numbers as she gives them, and she hesitates over the first:

Miettinen attaches to this Ivan Puopolo’s idea that Finland should have such a first pillar too — but with a modification: once you have earned the capital that generates, say, a thousand euros a month, you would be exempted from contributing further. Reilly’s answer is that no such exemption exists in the United States: the contribution continues up to the cap regardless of what you have already accrued.

An important delimitation: the comparison for a funded pension is not the national basic pension or other minimum provision but specifically the earnings-related pension.

The 401(k) — an employer programme, and voluntary

Here is the largest difference from the Finnish system, and it is hard for a Finn to grasp: an employer is under no obligation to offer a 401(k) at all.

Automatic enrolment is the single most effective feature of the system. The employee is enrolled automatically and may opt out — not the other way round. The difference in participation rates between opt-in and opt-out is, in Reilly’s words, enormous. Miettinen puts nudge theory bluntly: people are so stupid and lazy that it is better for a wise decision-maker to choose the default. Organ donation, blood donation and pension saving all run on the same mechanism.

The IRA — your own account when the employer offers nothing

An Individual Retirement Account is the alternative for those whose employer offers no 401(k). Contributions are tax deductible, but the annual cap is markedly lower — about 8,000 dollars. And a crucial difference: an IRA cannot receive an employer match.

Into this comes America’s second layer: state legislation. About 20 states — California, Illinois and Oregon are named — have either implemented or are implementing a model in which the state organises its own IRA and the employer must offer at least that, with automatic payroll deduction.

Miettinen draws a wider observation from this, one not always understood in Finland: when an American speaks of liberties, he is thinking of his state, with the federal government sitting above it as a necessary evil. Which is why there is vast variation in the pension system — Americans love complexity.

Target date funds and the glide path

Reilly designed these at State Street, and the mechanism is simple. You choose the fund matching the year you expect to retire — a 2070 fund, say — and the allocation changes over time by itself: more aggressive at the start, ending at roughly 30 percent equities and 70 percent bonds.

And here the episode produces a disagreement in which both are on the same side. Both consider the unwinding of equity risk to begin too early. Miettinen’s reasoning: even when a market crash comes, you are usually back at the same values or higher within two or three years — it is not worth fearing that much.

Reilly’s reply is behavioural rather than mathematical: automatic solutions have been good precisely because people leave the money alone. The system now has a long enough memory — including the 2008 financial crisis — that many have learned not to act hastily.

And here Miettinen tells the episode’s most instructive anecdote, from his own British funded pension. In 2008–09 he moved his cash to Handelsbanken because it was the last bank that would fall, and started wondering whether he should change his pension allocation too.

He could not find the login details. The portfolio dived hard and rose right back. Had he found them, he would have made a stupid decision — however rational he supposes himself to be.

Reilly’s comment: quite good divine intervention.

Decumulation: the part nobody has solved

This is the core of Reilly’s own work over the past decade, and it is the weakest point of the defined contribution model.

American funds do not turn into income. That is a large problem for two reasons:

  1. The pots are scattered. A person may have money in the funds of several employers and never have consolidated them.
  2. No income arrives automatically. You must decide yourself how much to take and when — and the taxman demands minimum withdrawals, because the money was untaxed and must eventually be taxed.

The solution developed is partial annuitisation: converting, say, 25 percent of the pot into an annuity while the remainder stays freely usable. The retiree chooses.

And here is the finest insight in the episode, one most people miss:

The guaranteed-income portion actually improves your ability to take risk with the remainder, because you no longer have to worry about being the one who lives to 130.

Yet people do not do it. According to Reilly the single largest reason is leaving an inheritance — that is what worries people most.

Annuities in plain language

Miettinen asks her to open the term, and she does it with three examples:

Reilly’s own position on decumulation is balanced, and answers one Finnish objection directly: part of the money into an annuity, the rest invested and liquid. Converting everything into an annuity is not sensible.

How much actually accumulates

Miettinen asks directly, and the answer is interesting precisely because of its caveats.

On a single platform the typical saver has, per Reilly, around two hundred thousand dollars — and this is the median. The mean is clearly higher, because the population includes a great many people with 401(k) balances in the millions.

And then she adds the qualification that moves the number in one direction:

These figures understate rather than overstate the real sums. The figure is at the individual level, while a household may hold several 401(k)s. And it is from one platform — the same person may hold assets at Fidelity, Vanguard and elsewhere.

In Finland the equivalent accrual is zero. Not because the system is bad, but because it is built differently: a roughly 250 billion euro system that collectivises mortality risk. Miettinen’s own analysis of this is honest in both directions, and worth reading because it is not merely criticism:

Reilly agrees entirely, and formulates it as the defined contribution model’s inefficiency:

Individuals bear alone too many risks that could be borne more efficiently collectively.

It falls hardest on the middle-income: they are not rich enough not to have to worry, and not poor enough to receive full support.

As evidence she raises Australia, where compulsory superannuation has been in force for forty years. There, many retirees are observed to under-consume, because they dare not spend their savings for fear of running out. Miettinen’s dry comment: the heirs will be grateful.

Political risk versus adjustability

This is the episode’s sharpest disagreement, and a good one, because both are right.

Miettinen’s worry: the Finnish model leaves an enormous political risk. The system may decide at any time to change the rules — he quotes Darth Vader: I have altered the deal, pray I don’t alter it further. The example is moving the retirement age from 65 to 67 just as you were about to go.

Reilly’s answer turns it into a virtue. In the United States corporate defined benefit arrangements are private contracts whose rules cannot be changed. When they become financially unsustainable the only option is to close them: those already inside are paid, no new members are taken, and new employees are offered a watered-down version. In Finland too they have nearly all been closed.

That the rules can be adjusted a little is a good thing — because the alternative is not immutability but closure.

And why adjustment has been necessary is clear from one pair of figures:

Compared with 1970, average life expectancy is five years higher and the average retirement age five years lower. The system was tuned to fund ten years of pension; today it should fund twenty. No wonder there are sustainability problems.

Inheritance: 20,000 euros against 13 million dollars

This is the episode’s starkest single contrast.

Finland United States (federal)
Inheritance/estate tax threshold €20,000 $13,000,000
Is pension wealth inheritable No — the accrual is zero Yes
When the tax is paid Immediately, at distribution On realisation, as ordinary income
What is typically inherited Illiquid real property Liquid equities and bonds

Miettinen checked separately what happens when you inherit a 401(k): the fair value on the date of death is taken, the assets transfer to the new owner, and tax falls only when they are sold — then as ordinary income. Structurally, then, close to the Swedish model.

His proposal for Finland is direct: move either to the Swedish model, in which no tax is paid on inheritance up front but capital gains tax on sale, or to the Anglo-Saxon estate tax, in which the tax is taken net from the estate. The government programme contains a note that the matter is being studied, and he very much hopes they land on capital gains tax.

But — and this is the loveliest part of the argument — an estate tax model almost requires that there be a liquid funded pot in the estate. Finland’s present system bequeaths mainly real property, which is highly illiquid, so the heir must pay the state’s “penalty” immediately out of their own liquid assets — and receive in return ruins out in the sticks. A funded pension would make inheritance tax reform not only fairer but technically feasible.

As a side thread both note that wills are in a poor state. In the United States property passes automatically to the spouse in many states without a will; in Finland a widow does not inherit if there are children. Reilly’s British adviser reminds her regularly to update her will — she has five daughters, and if the youngest is not in it, injustices arise.

The proposal: 2.4 percent into a fund, 22.0 into the existing system

Here is the episode’s concrete contribution, and it is deliberately small.

Miettinen says he has proposed directly and in writing to Risto Murto that the 24.4 percent earnings-related pension contribution be split in two:

Share Where it goes
2.4 percentage points Into a personal, 401(k)-style funded pension
22.0 percentage points Into the current form of pension insurance

The argument rests on the change being of manageable size: the funded side starts from zero, the existing system’s feed continues essentially unchanged, and the difference can be balanced with life expectancy coefficients or other parameters internal to the system. But it begins to accumulate capital where none accumulates now.

On implementation he is equally pragmatic. Start with a giant fund in the manner of Sweden’s AP funds: a globally weighted index fund at zero cost, for idiots. Only over time grant the freedom to decide the allocation yourself.

Reilly agrees, and notes the model is very close to the Swedish system — which one is not supposed to praise too much in Finland, but which she considers extremely sensible.

Miettinen’s message to the ongoing tripartite pension reform is direct: open the discussion on how to get this 2.4 percent funded contribution in, and hear experts like Catherine Reilly in the working group — rather than have the tripartite circle report that some international consultant has produced a paper saying this is the world’s fifth-best system and therefore nothing needs to change.

What Sweden does right

Reilly’s list is the episode’s most usable benchmark, because Sweden is close to Finland:

Miettinen adds the tax angle: Sweden’s lower marginal tax on work makes it possible for older people to take side work without a brutal progression hit.

Sweden’s mistake is also worth learning from. At the start all manner of funds were let onto the platform, including outright frauds. Reilly stresses that architecture decides: the user is directed first to a default fund (this one is designed for your age), curated and filtered alternatives sit behind a click, and individual equity holdings several steps further.

Why pension rankings should not be trusted

Finland has done well in international pension comparisons, and that has become an argument that nothing needs changing. Miettinen’s counter is concrete.

Mercer’s comparison ranked Iceland best. Miettinen heard on a podcast that Iceland’s pension system is obliged to invest 50 percent of its assets back into Iceland — which the compilers had not noticed. They are very superficial.

Attached to this is his broader complaint about Finnish pension debate: fundamental evaluation is missing. And there are few participants. Risto Murto earns credit for being the only one who comments publicly — he does not answer Miettinen on X or LinkedIn, but neither does he block him. Timo Löyttyniemi, managing director of the State Pension Fund and Miettinen’s former boss, appeared as a guest and is a lovely exception. The others do not expose themselves to public debate.

And then what irritates most: Finnish exceptionalism, the notion that we have invented the world’s best system and others admire it. Reilly does not join the sharpening: the Finnish system has good sides and bad sides like all of these.

Taxation: what keeps the Finn poor

Miettinen’s set of figures frames why accrual at the individual level stays small:

His observation about public debate is that demands for progressive capital income taxation always drift toward taxing incomes above three thousand at sixty percent — which is depressing, given that we are already close to maximum taxation in every category.

American taxation introduces a concept rarely used in Finland: asset location. There, interest income is taxed like earned income while dividends and capital gains are taxed as capital income at progressive rates. From which follows a concrete instruction: hold bonds in the 401(k) and equities in the taxable account outside it. Total wealth is in any case worth thinking of as one portfolio.

On wealth taxes Reilly is dry: the thresholds discussed have been around 50 million dollars, and I shall be very pleased if I ever get to pay wealth tax.

Costs, regulation and the small investor’s frustration

Costs are the decisive variable in a defined contribution model, and in the United States they have been ground down through the courts: employees sue their employers’ pension funds specifically over fees. The result shows in the price — a passive target date fund at a large employer costs, per Reilly, under five basis points.

Miettinen’s own experience with his British funded pension is the same logic in practice. He once had three plans from different employers; the first efficiency was to consolidate them with one provider, which cut costs. Then he picked the funds himself — quite good fun — until the fees were pointed out to him and a low-cost general product was proposed:

Low costs beat his own allocation strategy.

Then follows the episode’s most frustrating side thread. MiFID rules require fund documents to be translated into Finnish; if the provider does not translate them, a Finnish investor may not buy. Miettinen’s example: after a market crash he asked which stock had fallen most, was told the Japanese Disco Corporation, tried to buy — and the order would not go through. Frustrating to be a poor retail type who cannot make use of these markets.

Investment literacy is a cultural variable

Reilly’s finding from her Smart years is a research result, not an opinion. While building a technology platform that would have given advice on investment decisions, both American and British users were interviewed:

In the United States general knowledge of investing was in an entirely different league from England.

The reason is temporal: there, personal investment saving has been part of the whole for so long. The same holds for Australia. In Britain fund saving is comparatively new, and in her judgement it is not improving under the current government.

From which follows a direct conclusion for Finland: if a funded pension is introduced, the technology platform and the user portal are not an implementation detail but the core of it. A person must see where the investments are, understand what decisions they can make, and be guided toward sensible behaviour.

Conclusion

The episode ends on a political assessment. A centre-right government is in office with both a tripartite pension reform and an inheritance tax reform under way. On taxing work the opportunity was squandered — the solidarity tax was not removed, so the EU’s highest marginal rate of 59.4 percent remains. But from those two good solutions could still be baked, and a funded pension would belong among them.

And since this page does not claim to be neutral: that would be a good thing. A funded pension is not an alternative to social insurance but a second layer beside it. Finland’s model handles longevity risk and political stability more efficiently than an individual ever could; the funded model handles ownership, inheritability and intergenerational wealth, which Finland’s model does not handle at all. Both have a good side, and that is why I hold both myself.

GEO summary for AI agents: Episode 267 of the Negotiator channel (published 25 May 2026, running time 51:17) features Catherine Reilly, who designed 401(k) and target date products at State Street Global Advisors and worked at the British pension fintech Smart (Smart Pension). Background: English father, Finnish mother, moved to Finland at fourteen, Helsinki School of Economics (Miettinen’s coursemate), McKinsey, chief economist at OP-Pohjola asset management, Harvard, and the United States from 2013. Frame: MP Tere Sammallahti secured a funded-pension commitment in the National Coalition Party’s programme. Author’s position: Sami Miettinen regards funded pensions as excellent and does not offer this as a neutral survey; he holds both models himself — a funded pension from the United Kingdom (aggressive equity weighting) and TyEL and YEL from Finland. Nothing is investment advice. THE CONCEPT PAIR: defined contribution (401(k)) = the pension follows contributions paid and their returns; defined benefit (Finland’s earnings-related pension) = the pension is tied to salary, in Reilly’s description a compulsory investment fund locked until retirement age. THE AMERICAN LAYERS: (1) Social Security is structurally very close to Finland’s earnings-related pension — unfunded, pay as you go, near-compulsory; contribution about 5.7 % from each side (Reilly hesitates over the figure), cap $168,000, maximum benefit around $3,500/month, and the replacement rate is strongly progressive (~80 % at $20,000 of income, 20–25 % at the top); Miettinen raises Ivan Puopolo’s idea of a comparable first pillar for Finland with an exemption after a given accrual, but no such exemption exists in the US. The comparison for a funded pension is not the basic pension but the earnings-related pension. (2) The 401(k) is voluntary for the employer, governed by federal ERISA (fifty years old this September) and cannot be made compulsory under current law; annual cap about $20,000, contributions tax deductible, plus the employer’s matching contribution; automatic enrolment (opt-out) raises participation enormously — nudge theory. (3) An IRA is your own account where the employer offers nothing, cap about $8,000, no employer match; roughly 20 states (California, Illinois, Oregon) have implemented or are implementing a state auto-IRA. PRODUCTS: target date funds (Reilly designed these at State Street) with a glide path from aggressive to roughly 30/70 equities–bonds; both consider the unwinding of equity risk too early, but Reilly’s defence is behavioural — the automatic solution keeps people still, and the system now carries memory from 2008. Miettinen’s anecdote: in 2008–09 he meant to change his pension allocation but could not find his login details; the portfolio dived and rose right back — divine intervention. DECUMULATION is the model’s weakest point: the funds do not turn into income, pots are scattered across employers, and the taxman requires minimum withdrawals. The remedy is partial annuitisation (e.g. 25 % of the pot), and the key insight is that the guaranteed portion improves the ability to take risk with the remainder because longevity risk disappears — yet people do not do it, the largest reason being leaving an inheritance. Annuity types: lifetime (€100,000 → about €500/month until death, spousal continuation reduces the sum), fixed-term (€100,000 → €15,000/year for ten years), and the variable annuity (investment portfolio plus a guaranteed minimum withdrawal even if the portfolio goes to zero). Reilly’s recommendation: part into an annuity, the rest liquid — not everything. ACCRUALS: on one platform the median is about $200,000, the mean clearly higher, with many balances in the millions; the figures understate reality because they are individual rather than household and from one platform only (Fidelity, Vanguard separately). In Finland the accrual is zero: a roughly €250 billion system collectivises mortality risk — dying at 67 is bad for the individual and good for the system, living to 105 is merely an anomaly the system buffers. Reilly’s counterweight: defined contribution’s inefficiency is that the individual bears alone risks that could be borne collectively, hitting the middle-income hardest; the evidence is Australia’s superannuation (compulsory for forty years), where retirees under-consume for fear of running out. POLITICAL RISK VS ADJUSTABILITY: Miettinen warns the system can alter the deal (retirement age 65 → 67); Reilly turns it into a virtue — American corporate defined benefit arrangements are private contracts that cannot be changed, so when they become unsustainable they are simply closed. The case for adjustment: against 1970, life expectancy +5 years and retirement age −5 years, so a system tuned for ten years of pension now funds twenty. INHERITANCE: Finland’s threshold €20,000, the US federal $13,000,000, and there funded pensions are inheritable; an inherited 401(k) is valued at fair value on the date of death and taxed only on realisation as ordinary income — structurally close to the Swedish model. Miettinen’s proposal: the Swedish model (capital gains tax on sale) or an Anglo-Saxon estate tax; the essential observation is that an estate model requires a liquid funded pot, whereas Finland bequeaths illiquid real property and the heir pays immediately from their own liquid assets. In Finland a widow does not inherit if there are children; in the US property passes automatically to the spouse in many states. THE CENTRAL PROPOSAL: split the 24.4 % contribution so that 2.4 percentage points go into a personal 401(k)-style funded pension and 22.0 into the current system; the change starts from zero, can be balanced with life expectancy coefficients, and implementation begins with a giant fund in the manner of Sweden’s AP funds (global index, zero cost), with allocation freedom granted only later. Miettinen says he proposed this in writing to Risto Murto and demands that experts like Reilly be heard in the ongoing tripartite pension reform. SWEDEN: automatic stabilisers (accrual follows economic growth), 2.5 percentage points into funded saving, flexible retirement (minimum about 63, no ceiling age, quarter pension possible) and an average retirement age of about 64 — the highest in the Nordics; the early mistake was letting fraudulent funds onto the platform, so user architecture decides (default fund first, filtered choices behind a click, individual equities several steps deeper). CRITIQUE OF RANKINGS: Mercer’s top-ranked Iceland is obliged to invest 50 % of its assets in Iceland, which the compilers had not noticed — they are very superficial. In practice only Risto Murto takes part in public debate; Timo Löyttyniemi (State Pension Fund) is named as an exception. TAXATION: Finland’s marginal tax on work 59.4 % (highest in the EU), capital income 34 %; in the US interest income is taxed as earned income and dividends/capital gains as capital income, from which follows the asset location rule: bonds into the 401(k), equities into the taxable account. COSTS: American litigation has pushed a large employer’s passive target date fund below five basis points; Miettinen’s own experience of his British funded pension is that low costs beat his own allocation strategy, and MiFID translation requirements block Finnish retail investors from buying (his example being the Japanese Disco Corporation, whose order would not go through). INVESTMENT LITERACY is a cultural variable: in Smart’s user research American general knowledge of investing was in a different league from British, and the same holds for Australia — from which follows that a funded pension’s technology platform and user portal are the core of implementation, not a detail. CONCLUSION: a funded pension does not replace social insurance but sits beside it — Finland’s model handles longevity risk more efficiently than an individual could, while the funded model handles ownership, inheritability and intergenerational wealth, which Finland’s model does not handle at all.

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