Pension Vs. Generous 401k

[conquer891]

Hey shrewd financiers

I currently work in a hospital and my employer is offering us a one time opt-out of our current retirement plan (pension) and offering us an opportunity to switch to a retirement savings plan (employer/self contributory 401k). All future employees will only be offered the retirement savings plan from now on. I'd like to see what you guys think of the options allowed to me given my current situation.

PENSION:
I am currently fully vested in my pension after having served 5 years of service. Our pension benefit formula is:

1.76% of Final Average Earnings x Years of Service

I realize pensions are increasingly rare given their long term liabilities to employers. As I am only 26 years old, the prospect of not seeing my pension benefit until I am 65 is a bit daunting. The pension fund is currently very well funded (over 95%+) and I do not see much of a threat from competing institutions as my hospital is world renowned with a huge endowment. I currently make about $100k. I do have plans to go to grad school full time in a few years and if things go my way, I'd be moving on to a different sector.

RETIREMENT SAVINGS PLAN:
My employer will contribute 2.5% of my salary into my 403b with the added option of a 3% match. Once I hit 31 years of age, the contribution will increase to 5% with the option of a 3% match. The employer contributed funds would be fully vested from day one if I switch over. This means I could have up to 5.5% free money from my employer now with it increasing to 8% when I hit 31 (I fully intend to take advantage of the max match).

What would you guys choose in my situation? The 401k would be a better hedge against inflation since stocks would rise more accordingly than my salary would. Given our country's debt, I don't see an avenue to repay our debtors unless we inflate our way out.

I would also have more control over my 401k vs. blind hope that the pension fund wont be bankrupt when I retire. HOWEVER, employers do not change pension benefit formulas on employees. But in any bad climate, an employer can take away all matching/contribution benefits.

[Nika]

How much would you have to contribute if you choose to stay with the pension? Look at what would you have to put in order to get these financial benefits.

You can also and take the pension settlement when you leave your employer (in most cases).
My employer has a pension (50% of the highest 5 years of service, if you reach full retirement age and work at least x number of years). But on the pension website they have an estimate calculator that will tell you what your withdrawal settlement will be if you leave tomorrow and choose to "cash out" your pension. (I only count that amount in my retirement savings totals, because this is the money I know I will have if I choose to leave).

You don't have complete control over 401K until you leave the job and roll it over into an IRA. The funds are limited, they may or may not suck, and you have no control over fees.

You need to know more details, but there is a reason that most employers move away from pensions - and it is not for the benefit of the employees, it is to drastically reduce the cost to the employer.

You can have complete control over other things, like your ROTH, and if you are married you can max out your spouses 401k (what are the chances of 2 pensions in the family?).

[BMEPhDinCO]

If you are going back to school and leaving, the 401k would be better as you can take it with you. If you will stay there and keep working, you may want to consider keeping the pension and also adding to a rothIRA if you can. Reason being that if the pension is stable, it will be a hedge against the stock market in the roth. In otherwords, you will be diversifying.

[Like2Plan]

There are two things that I focus on from the info you provided. One is your match. 5.5% now and increasing to 8% in 5 years (and 100% vested) is an above average match. Secondly, you are planning to move on to another sector--which I am assuming will result in a different employer?

Firstly, what will happen to your pension contributions you have made up to this point? Will you receive a small pension or will the funds be converted to the 403b? Secondly, how much longer do you see yourself staying with your current employer and how much of a pension will you receive as a result? Will you have the option to withdraw your pension contributions when you leave and if so, will the fund also give you interest?

You can run through some scenarios. Say, you leave after 10 years. 1.76% of Final Average Earnings x Years of Service. 1.76% X 10 X average earnings =X . That figure would be frozen in time. Inflation will really impact this number when it is time to collect the pension some 30+ years in the future.

Do you think you will be ahead if you withdraw your pension contributions when you leave? You should find out what your options would be and if they pay any interest on the contributiosn. Even so, I think it would be unlikely that this option would have a higher rate of return on your contributions than going with the 403b.