Don't Bet It All On Your Employer

Steve Lacey, 45, an emergency-repair dispatcher for a utility company in Salem, Ore., has a personal life that reads like a holiday greeting card. He recently married his longtime love, and after packing boxes over Thanksgiving weekend, they are set to move into their dream house in the country, just in time for Christmas. Lacey's retirement plans, however, are in ruins. He works for the embattled energy-trading firm Enron, and has all his 401(k) savings in Enron stock, which plunged from $90 a share in late 2000 to $4.71 at the end of last week.

Much of that decline has come since October when Enron reported it had lost $638 million in the third quarter and later admitted it had overstated earnings from 1997 to 2000. As their life savings shriveled, all Lacey and his co-workers could do was watch. From Oct. 17 to mid-November, Enron blocked its employees from shifting investments in their 401(k) accounts, while it switched to a new plan administrator.

Lacey has joined a federal lawsuit that accuses Enron of breaching its fiduciary duty to employees by encouraging them to invest in Enron stock even after executives became aware of serious financial problems that would hurt the stock price. "There was a lot of promotion inside the company to invest in Enron and help us grow, so everybody got into it," Lacey told TIME's Cathy Booth Thomas. Enron says it doesn't comment on pending lawsuits.

Lacey and his colleagues could not have anticipated that they would be stuck with a plummeting stock. But their woes should be seen as a warning not to hold too much of your employer's stock in your 401(k) and to regularly monitor the diversification of your investments.

Like Enron's, many firms' 401(k) plans can have blackout periods lasting from a few days to a few weeks when they change plan administrators. "That's not necessarily wrong or illegal," says Alden Bianchi, chairman of the employee-benefits group at the Mirick O'Connell law firm in Westborough, Mass. Employees need to make sure their 401(k) investments are diversified at all times--in case they can't shift them for a while.

Like Enron, many other big firms match employee contributions with company stock. Your allocation to that one investment can grow very quickly. And you might not be allowed to reallocate those matching funds into other investments until age 50 to 55. At the end of last year, a whopping 39% of total assets in profit sharing and 401(k) plans were invested in the stock of the sponsoring company. Among employees who are allowed to hold their employer's stock in their 401(k) account, 18% invested half or more of their savings in that stock.

Financial planners will tell you it's a mistake to bet so much on a single stock--especially that of the company you work for, whose fortunes already affect your job security and career advancement. Planners often advise investors to hold as little of their employer's stock as they can--say, only the amount the company gives them as a matching contribution. Then they should shift assets out of even that matching stock into a mix of diversified stock-and-bond mutual funds as soon as they are old enough to do so. Similarly, if your employer gives you options to buy company stock, don't buy and hold the stock; cash it in and invest the proceeds in a diverse blend of stocks and bonds or mutual funds.

Remember that it's your responsibility to arrange your investments so that they can survive any financial trouble your employer might suffer. As financial planner Clare Wherley of New Providence, N.J., says, "It's not the company's responsibility to make sure your investments go up."

Sharon Epperson is a correspondent for CNBC Business News. E-mail her at sharon.epperson@nbc.com