Are You a Self-Destructive 401(k) Participant?

Partly because of the financial news media's influence, investors have focused on the wrong information. Retirement savings is pretty boring stuff, not nearly as fun as talking about the latest China.com play or whether Martha Stewart Omnimedia(MSO) can survive if its leader goes to prison. But investors need to understand the difference between business news and investment advice. The first is fun to watch and has no bearing on your retirement plans; the second is boring and spells the difference between a wonderful early retirement or a penny-pinching late one.

Company Men and Women

We have too much money in our company's stock. This has been a major problem since Studebaker went bust and left its workers' pensions empty, and it was a nightmare for Enron employees who lost their jobs and much of their Enron-pegged nest egg. And it's still a problem.

According to Greenwich Associates, participants in defined-contribution plans such as 401(k)s have 25.7% of their portfolios in company stock -- compared with 9.6% in fixed-income funds and a mere 3.5% in international stocks.

This is extremely dangerous because your job and your retirement are tethered to the fate of one company. We all hear the stories about the clerk at Wal-Mart(WMT) or the Dell(DELL) secretary who's now a millionaire because of their company stock -- these are rare stories of great good fortune that are akin to Publisher's Clearing House winners. Even if your company doesn't blow up like Enron or WorldCom, if you have too much of your portfolio in your company stock, you're vulnerable to a downturn in the company's fortunes. Stocks fall 50% over the course of a few years all the time -- it happened to both of my employers' stocks. If you are a few years from retirement when that happens, the results can be devastating.

Experts are in unison on this: Don't put a penny more than necessary in your employer's stock. Ted Benna, founder of the original 401(k) plan, even advocates legislation to fix excessive usage of company stock in retirement plans. "We have laws to force people to wear seatbelts to protect people who choose to not protect themselves, we need a law here, too," Benna said.

Neither a Borrower Nor Liquidator Be

Investors can take loans against their retirement portfolio. They also "cash out" their plans when they switch jobs. Both of these options are ill-advised, especially among younger investors, because you undermine the value of compound annual growth over time to attain goals that are often short term in nature.

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