Get that company stock out of your 401(k). Please

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There’s a moment in the documentary Enron: The Smartest Guys in the Room (it’s also in the book, on page 242) where the company’s head of HR is asked at a December 1999 employee meeting, “Should we invest all of our 401(k) in Enron stock?”

“Absolutely! Don’t you guys agree?” she says, looking over at Ken Lay and Jeff Skilling, who are on the stage with her. “You’re doing good,” Skilling says, grinning.

Those people ought to be thrown in jail for the rest of their lives just for that, I remember thinking when I watched the movie. Putting money in Enron stock late in 1999 was a disastrous move, of course. But putting anything but a tiny portion of your 401(k) in company stock, even if your company isn’t an Enron-like den of self-dealing and fraud, is always a bad idea.

I was reminded of this while talking Wednesday to Chris Jones from Financial Engines, one of several companies that’s making a good little business these days keeping people from doing really dumb things with their 401(k) money. It turns lots of people are still doing really dumb stuff: Jones said that 22% of of 401(k) participants still keep more than half the money in company stock, and half keep more than 20% in company stock.

What’s so bad about that? The first thing is spreading your risk: If your company goes under, as Enron did, but your 401k is invested in things other than your company, you may still be able to retire comfortably–unlike a lot of those Enron employees. Jones says the most sensible thing would be to own an index fund that holds everything but your own company’s stock, but that’s not an idea he thinks he could ever sell to his corporate clients.

Another factor that Jones explained to me is that the mean expected return on any single stock is going to be much lower than that of the market as a whole. Why’s that? Because the performance of the overall market over time is driven by a minority of superstar stocks–two thirds of the stocks in the S&P 500 actually underperform the index.

Now the flip side of all this is that, as Corey Rosen at the National Center for Employee Ownership would be quick to point out, companies where most employees own stock tend to outperform the competition. But the 401(k) should not be the vehicle for this ownership. It’s a retirement plan, the flawed-but-indispensible replacement for the old-line corporate pension. So keep that company stock out of it.

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