Here’s one of those good news-bad news stories.

The good news: Investors with 401(k) accounts lost much less than you’d expect last year, given the plunge in stock prices.

The bad news: Many did relatively well for the wrong reasons.

A study by the Investment Company Institute, the mutual fund trade group, and the Employee Benefit Research Institute, a nonprofit research outfit, found that the average 401(k) account lost only 7.9 percent of its value in 2002, even though the average stock fell by 22 percent. The study looked at accounts opened before the end of 1999.

Happily, it also found that investors didn’t panic during the bear market. They didn’t pull large sums out of stocks, and they generally kept contributing new money into their accounts with the same, sensible distribution among stocks, bonds and cash that they’d used in better times.

Here’s the rub: Total account values fell only modestly because most accounts are so small that new contributions made up for the falling values of older investments.

Among the 15.5 million accounts studied, the average balance at the end of 2002 was a too-small $39,885.

The average investor had 62 percent of his or her 401(k) money invested in stocks or stock funds.

Generally, that’s good. Most asset allocation models call for holding 50 percent to 70 percent of assets in stocks and stock funds, with the rest in bonds and cash, although investors well into retirement are usually told to trim their stock holdings somewhat. Stocks are riskier than bonds and cash but usually have provided bigger returns over long periods.

Unfortunately, too much of 401(k) investors’ stock holdings are in stocks of the companies for which they work. By having so many eggs in one basket, they take on too much risk.

Overall, about 16 percent of investors’ assets were in this so-called company stock. That doesn’t look too bad, but the view is distorted by the fact that half the plans didn’t offer company stock. Among investors who had the company-stock option, more than half had more than 20 percent of their assets in company stock, and 14 percent had more than 80 percent in company stock.

A bill to give 401(k) participants the right to sell company stock after three years passed the House last spring but is bottled up in the Senate because it contains other provisions many Democrats oppose.

As a general rule, a small investor should not keep more than 10 percent of his or her holdings in any single stock. So a large holding of company stock in a 401(k) would be justified only if you have large, well-diversified investments outside your 401(k). For most 401(k) investors, this isn’t the case.

Investors who have the option to trim their company-stock holdings should do so – with one exception.

That’s when the only way to get a matching contribution from the employer is to accept company stock. In this case, take the stock – and lobby the boss to lift the sales restriction.

Despite the company-stock problem, 401(k)s remain a good deal.

Jeff Brown is a business columnist for The Philadelphia Inquirer.

E-mail him at brownjphillynews.com.

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