Do you agree or disagree with the following proposition: It's OK to put all your investment eggs in one basket, as long as you watch the basket.

Most people would disagree, and rightly. You can't watch the basket closely enough.

So what are you doing with your 401(k) retirement savings plan? Around half of all workers invest in the shares of the company they work for, if the plan allows it.

Additionally, your employer may match your contribution with company shares.

So here's what you've got invested in your company basket: Your job, your current standard of living, your health and disability insurance and through your 401(k) your income for the rest of your life.

That's a bit much. Even your company's employee benefits managers think so, according to a recent survey by the investment consulting firm Rogers, Casey & Associates in Darien, Conn., and the Institute of Management and Administration in New York.

Of some 500 sponsors of 401(k) plans who responded to the survey, nearly 70 percent expressed some concern about how much employee money is being invested in company stock.

From your point of view, your company's stock may look like a terrific buy. Business may be booming. Stock prices have been bounding up.

That makes it especially hard to explain the risk, says financial planner Mike Martin, head of Financial Advantage in Columbia, Md. "There's an old saying," he adds, "don't confuse a bull market with genius."

Consider what happened to IBM, for decades one of America's premier stocks and heavily owned by its employees. In August 1987, IBM hit a peak of $175 a share.

After the October '87 Crash, however, it has never recovered, falling as low as $51 a share in 1993. Many IBMers had their retirements wrecked.

How much of your savings should you hold in company stock? Take your lead from the professionals. Traditional pension plans aren't allowed to hold more than 10 percent of their assets in a single company.

Sen. Barbara Boxer, D-Calif., has introduced a bill applying a similar rule to 401(k) plans, if the company directs all the investments.

You may not control the percentage of company stock you own. For example, say that your employer matches your contribution with company stock dollar for dollar. That means up to half your retirement fund will be invested in the company, whether you like it or not.

Some employers won't even match your contribution unless you use it to buy company stock.

You may be able to shift those shares into another investment after a certain period of time, says planner Michael Chasnoff of Advanced Capital Strategies in Cincinnati. But many employers make you keep them.

A few 401(k) plans are invested entirely in the company. Several such companies have gone bankrupt in recent years including Carter Hawley Hale, Color Tile, and the former Dart Drug ruining their employees' retirement accounts.

Nondiversified plans are vulnerable to employee lawsuits, but there might not be much to recover, says attorney Steve Saxon of Groom and Nordberg in Washington, D.C. Employees should raise this issue even when the company is doing well.

But let's say your company won't go broke. It's still unfair to match your contribution with company stock and not let you switch into something else.

Look at what's really happening here. Employers are backing away from traditional pensions; they're making you more responsible for your own retirement account; then they stop you from prudently diversifying your money. If you're buying these shares voluntarily, you should be warned about the risk.

It's all very well for employers to express "concern," as the new Rogers, Casey/IOMA study found. But then what? Those same companies may still match your 401(k) contribution with company shares, simply because that's the cheapest way.

How do you handle a plan that includes company shares?

(1) If you have free choice, hold your investment to 10 percent. If both spouses work for the company, that's 10 percent for each, says financial planner Faye Kathryn Doria in Rochester, N.H. Five percent would be even better.

(2) If your company uses shares to match your contribution, put your own money into other investments in the plan. Switch out of some of these company shares, if it's allowed.

(3) If you're forced to buy company shares in order to get an employer match, it's usually worth doing, Mike Martin says. You might be ahead even if the share price declines because so few companies go broke. If your spouse has a better plan, however, fund it to the max.

Rethinking tax-deferred investing

Congress hasn't yet settled on the size of the tax cut on capital gains. But assuming it's big, you're going to have to rethink your tax-deferred investing.

Everything from tax-managed mutual funds to variable tax-deferred annuities will be up for grabs. These annuities may not be a viable investment.

Capital gains are the profits you earn on your investments. Whatever the tax rate turns out to be, it's supposed to apply to profits you've taken since May 7, 1997.

You will not be affected by this cut if you invest only through tax-deferred retirement accounts. With these accounts, no tax is owed on your profits as they accumulate. At withdrawal, they're taxed as ordinary income, not as capital gains.

You also won't be affected if you're holding stock you don't plan to sell. When you die, any profits pass to your heirs untaxed. Death is the ultimate shelter from levies on capital gains.

In other situations, however, the size of the capital gains tax matters a lot. For example:

(1) You'll have to rethink your approach to tax-managed mutual funds. These funds defer taking net profits on stocks, so that shareholders won't owe taxes at the end of the year. But if those strategies hold down your fund's pretax performance, they may not be worth it anymore.

(2) You should still contribute to tax-deductible retirement accounts. But what should you do with other money on which you have already paid a tax? Should you put $2,000 of that money into an Individual Retirement Account and let its earnings grow tax-deferred?

That depends on how you use the after-tax account. If you trade in and out of individual stocks and mutual funds, it's still a good place for after-tax dollars, says Peter Elinsky, a partner in the consulting firm KPMG Peat Marwick. You can sell and rebuy without paying taxes every time. Nondeductible IRAs are also good for bonds and bond mutual funds.

But if you buy stock investments and hold them, you'll net more by keeping them outside a tax-deferred account.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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