Participants in 401(k) plans were never going to have huge chunks of their nest eggs in one basket—company stock—ever again. Regulators were going to tighten up pension laws and protect plan participants from inadvertently becoming too exposed.

Employers were going to preach the benefits of diversification, and employees were going to nod and acknowledge the risks of having their future too heavily concentrated in any one investment, especially the one that generates their current paychecks. No employee would have more than 10 percent to 15 percent of his or her 401(k) assets invested in company stock, and everyone would retire happily ever after.

But a funny thing happened on the way to that happy ending: Corporations have upheld their end of the bargain and have tried to wean their workforces away from company stock; employees, however, still can’t seem to get enough of their own cooking.

“It’s a fight against inertia, and that’s a tough fight to win,” says Richard Jefferies, managing director of retirement at Duke Energy, which had about $3.4 billion in 401(k) assets at the end of September, roughly 53 percent of which was in company stock. “We tell employees that having too much exposure to a single company is the riskiest investment in our 401(k). We’re upfront about it.”

Duke is hardly alone in its uphill battle to decrease its 401(k) participants’ dependence and large exposures to company stock. An analysis by Workforce Management sister publications Financial Week and Pensions & Investments found that the 65 biggest corporate defined-contribution plans for which data were available with all DC assets in a 401(k) (as opposed to, say, an employee stock ownership plan) had $325 billion in combined assets, and roughly $86 billion—or 26 percent—of that was in company stock.

Fifty-three of these corporations had more than 10 percent of their 401(k) assets invested in company stock. In fact, 42 percent of these large 401(k) plans have at least a quarter of their assets in company stock, while corporations such as General Electric and Chevron, along with Duke, have more than half of their 401(k) assets in company stock.

Many corporations have historically made matching contributions to 401(k)s using treasury stock, rather than cash, because it would allow them more flexibility in maneuvering through periods of poor cash flow. As the typical employer match to a 401(k) is 50 cents on every dollar, such a practice means that roughly one-third of an employee’s 401(k) assets would automatically start in company stock—and that’s before it has the chance to appreciate in value and grow to an even larger piece of the portfolio.

Plus, many corporations would lock employees into the company stock for a certain period of time before allowing them to sell it.

“People have a tendency to just leave things alone,” says William Quinn, chairman of American Beacon Advisors, which manages $64 billion in pension and short-term cash assets for American Airlines, including its $12 billion 401(k) plan. “It’s a challenge to get people to rebalance and think about their exposure to company stock. Once people are in, it’s difficult to get them out.”

Employers, by and large, seem to be willing to do whatever it takes to get their 401(k) participants down to at least a reasonable level of company stock in their portfolios, says Pamela Hess, director of retirement research at Hewitt Associates. The Pension Protection Act, she pointed out, has made more plan sponsors concerned about such exposure,and ultimately their fiduciary risk, as the law specifically highlighted new diversification requirements involving company stock.

The PPA included a provision that if 401(k) participants receive a matching contribution in company stock, then they must be permitted to divest the company stock after three years of service. The provision suggests that companies are assuming greater fiduciary risk if company stock holdings in 401(k)s grow out of control. As a result, many companies seem to be responding, and they are going above and beyond the PPA requirements. Roughly 67 percent of plans now permit participants to diversify or transfer company stock contributions immediately, compared with 46 percent in 2005, according to Hewitt.

But just because a company permits participants to divest company stock at any time, it doesn’t necessarily mean that employees will act accordingly.

Take food safety company Ecolab, for example, which matches contributions mostly in company stock and allows its employees to divest right away. Ecolab had a little more than half of its $1 billion in 401(k) assets in company stock at the end of September, largely because the stock has posted some spectacular numbers, says Mike Monahan, a VP in the investor relations group at the St. Paul, Minnesota, company.

Indeed, Ecolab’s stock returned 18.08 percent on an annualized basis from September 1991 through last September, compared with 11 percent for the S&P 500.

Although employees at Ecolab have 25 different investment options in the 401(k), they can’t seem to get enough of a good thing. The company stock option, Monahan said, has been one of the five top performers among all of the investment choices on Ecolab’s 401(k) platform in almost every period since the 401(k) plan’s inception.

“We have a robust set of investment options available to employees in our 401(k), but our company stock has consistently been one of the best performers,” he says. “We have done an extensive amount of education with our employees, but it’s difficult to avoid an asset with such a substantial return.”

In addition to broadly educating employees about investments and diversification, many corporations have stopped using company stock to make matching 401(k) contributions, while others have begun placing restrictions on the amount of company stock an employee can have in his portfolio.

Hess points out that a Hewitt survey of large corporations found that only 23 percent invest the employer matching contribution in company stock, compared with 45 percent in 2001. Meanwhile, 18 percent of companies surveyed by Hewitt now place restrictions on the amount employees may contribute to company stock, up from 14 percent in 2003. Among those with such restrictions, most employers limit contributions to no more than 50 percent company stock.

“People have a certain comfort level with their own company’s stock,” Hess says. “They think they have some skin in the game—plus they may understand it more than any other option in their 401(k)—so sometimes you have to steer them in a different direction.”

And this more direct approach seems to be gaining appeal with even more corporations. At International Paper, for one, the company plans to begin making its matching 401(k) contributions entirely in cash at some point later this year, says Robert Hunkeler, VP of investments, who oversees $4.4 billion in 401(k) assets for the company, roughly 10 percent of which is in company stock.

When International Paper, which currently makes its matching contribution in a combination of stock and cash, froze its $13 billion defined-benefit plan in 2004, it “created a new generation of employees who will rely much more on our 401(k) than ever before,” Hunkeler says. “It’s one more step in a long-term process to essentially give complete control to the plan participants.” He added that employees are also no longer required to hold on to company stock contributions for a certain period of time before they can sell.

Duke Energy, whose 401(k) participants are still heavily concentrated in company stock, has managed to lower the overall allocation in recent years—it was upwards of 70 percent of total assets several years ago—by educating its employees and adding new investment options to its plans. But because the Charlotte, North Carolina-based energy company had for years made its generous dollar-for-dollar matching contribution (on up to 6 percent of employee salary) using company stock, it has a good deal of unwinding to do—part of the reason the company decided to begin making its matching contributions in cash after it merged with Cinergy in 2006 and the companies combined 401(k) plans.

Jefferies also mentioned that the company expects to add a managed account program this year, which would give employees the option to have their 401(k) portfolios overseen by an outside advisor and ensure that the company stock component stays at an appropriate level.

Putting in a managed account program might be one of the best ways for corporations to permit their employees to have a portion of their 401(k) assets invested in company stock, without letting that investment grow out of control.

“It’s a way to systematically address and unwind a challenging behavioral phenomenon,” says Lori Lucas, senior vice president and head of the defined-contribution practice at Callan Associates. “When your company stock performs well, it’s difficult to sell, and when it does poorly, it’s a buying opportunity, and that’s a very challenging mind-set to overcome.”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.