Keeping a little too much company.

For the most part, the company stock offered as part of your 401(k) plan seems like a good deal, especially if you think the firm is going places and you expect the shares to appreciate in value. For you, it's a chance to cash in on your employer's success. For the company, it's always nice to put shares in friendly hands--in this case, with employees who value their jobs and take pride in their work.

That kind of scenario has made company stock a popular offering in retirement plans nationwide. Today, 41% of the 24 million Americans covered by 401 (k) plans can invest all or part of their nest egg in company shares. And it's an even sweeter deal if your employer matches your contribution dollar for dollar. Currently, says Steven Gross, an executive vice president at the Troy, Michigan, employee benefits outsourcing company MAVRICC Management Systems Inc., many companies have seized upon the bull market and now see stock as an attractive supplement to wages.

Before you jump headlong at the deal, take a moment to reflect. Yes, you might have read somewhere that Microsoft employees who bought up company shares before the software behemoth went public are now retiring early. But what happens when your company isn't Microsoft? Or, heaven forbid, what if your employer goes belly up? According to Erin Kramer, manager of legislative affairs for the Association of Private Pension and Welfare Plans, a Washington, D.C.-based lobby group, this doesn't happen very often. But, she hastens to add, the chances of it happening are all the greater with newer or start-up companies, which sometimes offer company stock as the only investment choice in their 401(k) plans.

The unthinkable happened to the rank and file at Color Tile just last year. Employees of the West Coast linoleum retailer got stung when the company closed its doors last year, essentially wiping out any and all value to its shares. Color Tile recently filed for bankruptcy, and although the employees are first in line to be paid, their retirement savings are likely to be tied up in court proceedings for quite some time.

That, in part, prompted California Sen. Barbara Boxer to introduce legislation to limit the amount of company stock a participant can pile up in his or her 401(k) to 10%. The Boxer Bill, as it's called, is now part of the Clinton Budget.

SETTING LIMITS

No matter when the Boxer Bill becomes law, most financial planners advise you to keep a cap on the amount of your retirement nest egg you're tying to your company's fortunes. "Participants need a diversified portfolio of stock'" says Ted Benna, president of 401(k) Association, a Cross Fork, Pennsylvania, group that monitors the industry. While you might be lucky enough to work at a technology company or industry titan whose shares are rocketing upward, you're taking on far too much risk, he says. Benna advises no more than 10% in one stock option including company stock. Instead, as he and other experts will tell you, it's best to funnel: the majority of your retirement savings into well-diversified mutual funds offered in your 401 (k), thereby ensuring yourself a cushion when the markets have their rough days.

When should you buy? According to Benna, stocking up on company shares after your employer has put out a lot of good! newts might seem like a good time to seize the opportunity, but it may actually be the worst time to invest. "The stock may be overvalued at that point," he says, adding that it may be better to invest when the news isn't necessarily good; the market may just be overreacting or overeager.

There's one other thing to consider when loading your 401(k) up with company shares: liquidity. While many small and fledgling companies might have stock to offer, their shares might not trade readily on the open market. That doesn't inhibit your company from issuing enough to sell to 401 (k) participants. It does bring up a sticky situation, however, the day you retire and need to cash in. First off, Benna says, it's probably best to be wary of how much you're investing in your firm's stock if it isn't publicly traded--that is, if the stock isn't readily available on the stock market. How can you check? Look in the newspaper stock listings and also call your employee benefits or investor relations of office to verify which exchange the shares trade on. --Kelli D. Herd