People may or may not learn from their own mistakes, but apparently, the idea that people learn from other folks' mistakes is a myth.

OK, maybe that's not fair, but it was hard for me to avoid that conclusion as I read an email from Fidelity's PR crew not long ago. Every quarter, Fidelity data-mines its 401(k) records and issues a little report on trends in 401(k)-land. And while Fidelity always -- of course -- puts its own corporate spin on things, its database of 11.1 million participants is big enough to be a pretty good indicator of what's going on out there.

There are a bunch of interesting points in these missives, but one in particular jumped out at me on first read: In the third quarter of 2009, 8% of dollars contributed to Fidelity-administered 401(k) plans went to the participant's employer's stock.

That may not sound like a lot, but it's enough to worry me -- lots of 401(k)s don't offer a company-stock option, so that 8% number is a lot higher among people who actually have the option. Haven't those folks been watching the news?

Too many eggs, not enough baskets
As far as I'm concerned, even if your employer pays the 401(k) match in company stock, holding it for the long haul is one of the biggest mistakes you can make with a retirement plan. The reason is pretty simple: Even if you don't own a single share of your employer's stock, your financial exposure to the company is already huge -- you work there!

But it often doesn't look like a mistake to folks until it's too late. In fact, it might seem like a really good idea, especially if you work at a big sturdy firm like Marathon Oil (NYSE:MRO) or CVS Caremark (NYSE:CVS). After all, while business cycles happen, the odds that those companies will go the way of Enron seem really low.

Of course, that's what the folks at Bear Stearns said.

In all seriousness, I don't think either of those companies is going away anytime soon. (In fact, I think there's a good case to be made for buying Marathon Oil right now.) But that doesn't mean betting your future on their stock price is a good plan. After all, plenty of big names have seen big drops since the S&P 500 peaked Oct. 9, 2007, the recent rally notwithstanding. And in many cases, their employees' 401(k) balances got clobbered as well:


Percentage of 401(k) Assets
in Company Stock

Decline Since 10/9/07

Marathon Oil



CVS Caremark



Citigroup (NYSE:C)






Applied Materials (NASDAQ:AMAT)



Fifth Third Bancorp (NASDAQ:FITB)



Sources: Yahoo! Finance,

But most of those stocks will come back!
Maybe so. But imagine if you'd been working for Citigroup for the past 15 years, and investing the majority of your retirement savings in Citigroup stock. You would have been feeling pretty good about things -- until the banking crisis happened.

Now imagine that you're retiring in a month. See, this is where even great companies' stocks can end up being a retirement disaster, because even great companies hit rough patches. And sometimes, not even a dramatic comeback will save you. Take Whole Foods Market (NASDAQ:WFMI), where 16% of 401(k) assets are invested in the company's stock. The stock price has made a great recovery since February, but it's still down around 50% from the market's peak as I write this. That's a big chunk of savings -- gone.

And if you'd been investing all of your 401(k) contributions in Whole Foods stock every month for the past 10 years, and you were looking to retire soon, you'd probably be pretty unhappy with your current portfolio balance. When there are so many great stocks out there, are you really willing to bet your future on your employer's?

Want a better way to invest your 401(k) balance? Check out the model portfolios from the Fool's Rule Your Retirement crew; they're easy to understand, optimized for long-term success, and adaptable to almost any plan. Grab a free trial now for 30 days of complete access.

This article was originally published Aug. 14, 2009. It has been updated.

Fool contributor John Rosevear has no position in the companies mentioned. Whole Foods Market is a Motley Fool Stock Advisor recommendation. Garmin is a Global Gains recommendation. The Motley Fool has a disclosure policy.