Time Bomb

Employees at struggling big-name companies such as Gillette, Lucent and Campbell Soup have suffered some horrific losses in their 401(k) plans in the past few years. Dozens more plans of similar pedigree could implode at any time. Why? Too many companies have loaded their plans with too much of their own stock, leaving employees dangerously concentrated in a single security. Are you one of them?

Nearly 100 of the largest corporate plans have at least 30% of 401(k) assets in their own shares, says the Institute of Management and Administration's DC Plan Investing Report. That's a hefty slice sure to couple painful volatility in the short run with potential disaster in the long run. Some plans, such as those at Sherwin-Williams (92%), Dell (88%) and Pfizer (89%), are almost entirely in company stock. It looks great when times are good, but there's a double whammy that hits home if the company's fortunes ever fade, as has been the case at Dell lately. While the stock falls, those who get laid off see their savings obliterated when they need them most.

Consider John Ellis, 45, who worked at AT&T; and then at its spin-off Lucent for a total of 24 years. He left Lucent before the telecom equipment maker's recent string of bad news. But his 401(k) was always fully invested in Lucent stock, and a year ago, it was worth $500,000. A brutal 75% slide in Lucent's price in the past 12 months chopped his balance to $130,000. Sadly, Ellis' plight isn't unusual, nor is this solely a tech experience.

Gillette has a whopping 66% of plan assets in Gillette stock, according to IOMA. That weighting crushed the company's typical 401(k) account as Gillette shares plunged 11% in the past 12 months and 36% in the past three years. The story is similar at Campbell Soup, where the stock, though up in the past year, has fallen 43% over three years. Other plans that have taken it in the chops include Procter & Gamble's, Norfolk Southern's and Cooper Tire's. In each of these cases, employer stock accounts for more than half of the plan's assets.

Who's at fault? There's plenty of blame to go around. Start with Washington. Even though tens of thousands of working stiffs have seen their nest eggs decimated, no one is stepping up to fix the one-stock scourge. In the mid '90s, Senator Barbara Boxer of California championed a bill to limit employer stock to 10% of plan assets. But companies opposed it. Boxer won a watered-down version with no teeth. She has moved on to other issues, and no one else has taken up the cause.

Certainly employees share the blame. They should almost never buy employer stock in their individual plans--yet they do in droves. That's a mistake because they already have their careers riding on the health of their employer, and increasingly they're being given stock options that further leverage their financial well being to the company's. In a paper to be released this week, the American Benefits Council notes that 39% of large companies grant stock options to at least half of their work force, up from 17% in 1993.

The smart move is to diversify with discretionary dollars--not double or triple the bet on your company. Does diversification work? You bet. Consider the odds. At the end of 1999, 31% of all stocks in existence for five years--nearly 1 in 3--traded at a price lower than where they had stood five years earlier. On the other hand, less than 1% of stock mutual funds suffered a loss, according to fund company MFS.

But companies are most culpable. Too often, CEOs view shares in the 401(k) as a convenient shareholder base that won't sell if earnings fall short and sides with management on tough issues like a takeover. That's why in most cases you can't sell shares given as a match until age 55. "It confounds me why this issue is not on the front burner," says Mike Scarborough, ceo of Scarborough Group, which advises 401(k) participants.

Amazingly, the more stock employees are given, the more they seem to buy. In a study, the Employee Benefit Research Institute and Investment Company Institute found that in plans with company stock as an investment option but no company-stock match, the typical employee directs 20.2% of his or her own contributions to the company's stock; in plans that match with stock the typical employee directs 29.3% of his or her own contributions to the company's stock. Employees tend to view the match as an endorsement of that investing strategy, which is plain silly.

We need to change our thinking. Lawmakers should take up the issue of limits. These plans are the foundation of the nation's retirement system and should not be exposed to needless risk. You should think diversification and stop thinking of a stock match as a gift. It's not. It's a benefit that you earned, and it sometimes comes at the expense of other benefits, like a pension. And employers should get ahead of the debate by allowing workers to sell company stock in their plans as they see fit, or match in dollars instead of stock. If that erodes a stable shareholder base, so be it. In this era of self-directed retirement plans, employees shoulder much of the burden and shouldn't have their hands tied.

E-mail Dan at kadlec@time.com . See him Tues. on cnnfn at 2:15 p.m. E.T.

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