Make This 401(k) Problem Go Away

For retirement investors with big balances in their 401(k) accounts, the past two years have been exactly what the doctor ordered. Back in 2009, many were staring into the abyss, having lost a huge portion of their life savings and wondering if they'd ever be able to retire. Now, the recovery rally has made the S&P 500 Index nearly double and has brought many 401(k) accounts back from the brink.

Although recovering retirement prospects are a cause for celebration, it's important for investors not to get too carried away by the bounce in stocks. Unfortunately, despite the lessons of two years ago, many workers are still taking a big risk in their retirement accounts -- and it could well come back to bite them in the years to come.

All hail the recovery
Whether you have your money in a 401(k) for retirement or a taxable account, the market rebound has probably helped you. According to the Employee Benefits Research Institute, the average 401(k) account balance for longtime workers nearing retirement has risen nearly 17% from the beginning of 2010 to the end of last month. Combine those figures with gains of nearly 23% from the same period during the previous year, and retirement investors have had quite an enjoyable ride -- one that has mostly helped workers catch up from their losses during the market meltdown.

Typically, in response to a big bull move like we've seen over the past two years, investors get complacent or even cocky. Certainly, market volatility has been near multi-year lows lately, and even political unrest in Egypt hasn't had any material impact on the financial markets.

That complacency is showing itself in another way: how much of their 401(k) assets employees hold in employer stock. Although owning company shares may seem like the best thing to do from a "know what you own" perspective, it leaves you dangerously exposed to your employer's financial condition.

The worst offenders
With the help of BrightScope, I took a look at some of the companies with retirement plans that have extraordinarily high percentages of their assets invested in employer stock:

Source: Brightscope, Morningstar.

Now granted, many of these companies are among the bluest of blue-chip stocks. Collectively, you probably own at least small amounts of all of these stocks, either through index funds or based on their own individual merit.

But bad things can happen even to good companies. Chesapeake has suffered through a long period of low natural gas prices. General Electric and US Bancorp had to deal with serious threats during the financial crisis as systemic risk threatened both GE's Capital division as well as even the relatively healthy loan portfolios at US Bancorp. And even though stalwarts like ExxonMobil and P&G have held up well even during severe bear markets over the past decade, both of them have competitors within their industries that have seen big problems and have hurt shareholders.

Don't put your financial life at risk
More important is the fact that even without investing in company stock, you already have a huge financial investment in your employer. As your primary source of income, your job relies on your employer's financial health. If things go bad at your company, then you could face both a falling stock price in your 401(k) as well as a layoff or salary cut from your job -- a double-whammy you may not be able to endure.

401(k) plans can be very useful ways to save for retirement. But even though investing in your employer's stock may seem like a good idea, think twice before you put a huge amount of your retirement savings in company shares. Given the risk, you're better off spreading your financial exposure out a bit further.

Looking to rescue your retirement? Read John Rosevear's simple trick that makes millionaires.