Dear Dagen: How Much Is Too Much Company Stock in a 401(k)?

Loyalty is one thing, but there are dangers in investing too much in your company.
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I'm 21, one year out of college and working as an engineer for Raytheon (RTN.B) , the large defense contractor. I regularly contribute to my 401(k) and receive a company match in Raytheon stock. I can sell this stock once I have it. Most outside sources say that you should sell your company stock, hedging both your job and your retirement savings. My friends in the company say that I should just keep my money in the stock, which represents 26% of my retirement portfolio. Given my young age, my desire to contribute greatly toward my retirement and my predilection for higher risk, should I just continue to accumulate the Raytheon stock or sell it to hedge against my job security? -- Paul Storaasli

Paul,

Many financial professionals will patently tell you that you shouldn't have any retirement money in your employer's stock.

But a simple solution can still be wrong.

The argument that you've heard goes something like this: Your livelihood depends on your company's prosperity. If you start accumulating your employer's stock, you'll then have both human capital and financial capital tied up in the company. With a large portion of your assets in company stock, your retirement savings may also become dependent on the company's success. In the worst scenario imaginable, the company starts to flounder and you lose your job and your retirement money.

Frightening? Yes. But avoiding company stock altogether might be the wrong decision -- despite this horror story.

Many companies -- 52% to be exact -- offer their stock as an investment option in their 401(k) plans, according to

Hewitt Associates

, a management consulting firm in Lincolnshire, Ill. Of companies with that option, 46% use their stock to match employee contributions.

"As a general principal, you should take advantage of the company match," says Mike McCarthy, a 401(k) consultant at Hewitt. "If you don't, you're giving up free money."

Luckily, your company's plan lets you sell the stock once it's in your account. "Sometimes employees won't have flexibility in selling it," says McCarthy. "It's common for some companies to require you to leave it in that stock for as long as you are with that company."

But you can sell your stock whenever you like. So you have some other questions to answer.

Start by looking at the stock objectively. That means conducting an unemotional analysis of the stock and the company's prospects. Employees, after all, should have some special insight in a company's prospects. However, you should still examine what outsiders, like securities analysts, are saying about the long-term fundamentals of the company and the sector.

Assuming you decide the company's prospects are bright enough that you want to own at least some of its stock, you'll have to determine how much you want to hold.

When you do, take into account other stock purchase options that might be available. Your company might have a plan that allows you to buy shares (outside your retirement plan) at a discount to the market, or you might have stock options. First and foremost, you need to gauge your total exposure to your employer's stock and determine what percentage it is of your overall investment portfolio.

Then you have to decide what's the right percentage. It's hard to put a number on it.

According to research conducted by

Charles Schwab

, if an allocation to a single stock is greater than 30%, the risk of that individual security starts to dominate your portfolio.

"Anything over that is probably overconcentrated," says Bryan Olson, director of research at the

Schwab Center for Investment Research.

Other professionals might tell you to keep your allocation between 5% to 15% of your portfolio.

Only you can decide how much risk you are willing to take. At 21, you're surely young enough to take bigger risks than when you're closer to retirement age.

There are other issues that go along with owning your employer's stock, particularly loyalty to your company.

But I have yet to find a good barometer for emotional attachment.

Send your questions and comments, along with your full name, to

deardagen@thestreet.com.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.