Investing in your company's 401k seems like a practical endeavor, but recently we are seeing news stories that are making some people think it is an error. Now may be a good a time as any to ask yourself if you are counting the number of eggs in your nest egg before they have hatched. There is a growing concern over employees who have lost most or all of their 401k assets in their employer's stock. If the stock takes a beating, so does your retirement savings.

The Risk of No Restriction

There are no current restrictions as to how much and employee can invest in their company's 401k plan. The Employee Retirement Income Security Act of 1974 restricts traditional pension plans (also known as defined benefit plans) from investing more than ten percent of assets in company stock, yet there is no comparable restriction on 401k plans. Employees can throw in a large sum to company stock. Employer-matched contributions many times come in the form of company stock. Recent studies reflect that employees who are granted the option of investing in company stock, do so with a rate of using over 25% of their assets.

An Eye Opening Anecdote

The fall of Enron Corporation focused attention on the devastation that can take place in investing in company stock. About 58% of employees' 401k assets were invested in Enron stock as it fell 98.8% in value during 2001. Employees at many other companies still have larger percentages or their 401k assets tied to company stock than Enron employees did.

Calculating the Consequences

It is a common staple in the investment world to have a well-diversified portfolio (essentially, don't put all your eggs in one basket). When things are going really well for your company and its stock, then things will follow in a similar fashion for your investment. The reverse, of course, is also true and many companies experience fluctuations in both operational performance and stock price. This warrants placing much 'stock' in the stock market as a whole, as well as in your company's individual stock.

Don't Give Them a Hold on Your Money

Some companies place restrictions on the opportunities of what you could do with your money once it is invested into company stock, such as limiting ability to buy or sell the stock, or transfer it to another type of investment within your 401k. Some companies that offer employer-matched stocks may require it to remain untouched until a certain age or date. If this particular stock plummets, so will your investment and opportunity to place it elsewhere. Some companies go through periods where they may 'lockdown' the money in order to perform administrative tasks. This usually isn't very long (days to weeks), but it could coincide with the fall of their stock (this happened at Enron).

How Many Pennies Is Too Many?

A good investment rule of thumb is to invest no more than 10 to 20% of total investment assets into company stock. Investing more will leave you susceptible to possible money limits or loss that has previously been outlined. Sure, every person and company is different, so it would not be unwise to link yourself up with a prominent and knowledgeable resource for retirement plans. The investor will also be able to provide insight into your possibilities and opportunities in looking into diversification (spanning your eggs).

Diversification

Diversification is the principle of spreading your investments amongst different markets, sectors, industries, and securities. The main goal is to have your money invested in different places in case one area takes a nosedive; this way your economic future is not contingent on the success of one single area of investment.

Take Control

If invested in company stock, keep a close eye on your options as far as that stock and spreading your other assets. Here are some things to consider:

- Amidst company stock, look at stock options, pension plans, employee-directed stock purchases and company matches. Look into your exposure as far as company stock via mutual funds. If over twenty percent of your total investment portfolio is tied to one area, seriously reconsider spreading your assets along a broader spectrum of investments.

- Know your options as far as buying and selling company stock.

- Do continual research on your company. Peruse annual reports, quarterly reports, and reports of material events.

- Go to outside sources such as analyst reports regarding your company stock. Don't rely on your company to give you all of the information because it may be biased (after all, they do not want to lose your money).

- Maintain realistic expectations-nothing good comes quick and easy.

Retire On Time

Investing in company stock is a 'give and take' process; when things are good, so will you be and when things are bad.. Remember that while considering investing in company stock that you have to be a bit selfish. Your company is not going to take care of you into your old age (especially if they grow old and expire before your time). You have to consider your ultimate financial security; there will come a time when you will be ready to kick the 'work bucket.' Make sure you get retire when it is your time to do so.