It's as simple as this: If your employer goes bust, you lose your source of income and a good chunk of your life savings. That's the first rule of investing, but it's lost on vast numbers of Americans and American companies -- and not just Enron.

In two-hankie testimony last week, a group of Enron workers told Congress how they were wiped out by their employer's bankruptcy. Some had 75 percent or more of their retirement plan in Enron stock, which plunged from almost $85 per share a year ago to 53 cents.

In response to the Enron tragedy, U.S. legislators including Sen. Barbara Boxer, D-Calif., have introduced at least two bills that would limit the use of company stock in 401k plans.

Although Enron's abrupt slide into bankruptcy was unusual, its 401k plan was fairly typical for large companies. Employees had a range of investment options for their own contributions. For every dollar they put in the plan, Enron contributed 50 cents in Enron stock. Employees couldn't transfer that stock into other options until age 50.

If employees had put their own contributions into anything but Enron shares, the 50 percent match in company stock would have made up one-third of total contributions. But at the end of 2000, Enron stock accounted for 62 percent of total plan assets, according to one employee lawsuit. Of course, at the end of last year, Enron stock was near its peak, which contributed to its outsize proportion in the retirement plan.

Enron is hardly the only company whose employees are heavily concentrated in company stock. At Procter & Gamble, Abbott Laboratories, Dell Computer, Pfizer, Anheuser-Bush, Coca-Cola and McDonald's, company stock accounts for 74 to 95 percent of retirement plan assets. Overall, company stock accounts for about 20 percent of the $1.8 trillion held in 401k plans, according to Cerulli Associates.

Although many companies offer their own shares as an option in retirement plans, less than 1 percent require employer contributions to be invested in company stock. However, most of those that do are very large, accounting for 6 percent of all plan participants and 10 percent of all plan assets, according to the Employee Benefits Research Institute.

In plans where the employer matches employee contributions with its own shares, company stock accounts for a staggering 52.9 percent of total plan balances, according to EBRI. When a company matches with its own shares, employees are more likely to invest their own contributions in company stock. "They think it's an endorsement" of the stock, says Shlomo Benartzi, an assistant professor at the University of California at Los Angeles. "It's implicit advice."

In plans where the company-directed match is in stock, 33 percent of employee-directed balances are also in company stock, compared with 22 percent in plans where company stock is an option but not a requirement, EBRI says.

Companies get a tax deduction for their contribution to retirement plans, whether it's stock or cash. There are virtually no limits on how much company stock employers or employees can contribute to 401k and other defined contribution plans, which allow a certain contribution each year. However, federal law prohibits traditional defined benefit plans, which are managed by professionals and guarantee a specific retirement income, from investing more than 10 percent of their assets in company stock.

So how much company stock should ordinary investors put in their defined contribution plans? Many experts say none. MPower, a San Francisco firm that helps employees manage their retirement plans, advises workers not to own any individual stock in their 401(k) plans, and that includes company stock.

"Our software would say to sell it," says Andrew Huddart, MPower chief executive. "Concentration in any one stock is not a good thing if you want to hedge your bets and reduce your risk."

Even Corey Rosen, director of the National Center for Employee Ownership, says company stock doesn't belong in a 401k plan. Employees, he explains, have two investing needs. One is retirement. A 401k plan should be invested so if nothing else works out, the employee can still retire. And that requires diversification.

The other goal is building wealth, and that requires concentration in a few investments that could hit it big. This could include company stock, but it involves substantial risk. "You want a base of diversified assets so you can afford to take that risk," he says.

Companies should set up a secure, diversified retirement plan and a separate, wealth-building employee ownership plan. Many companies do this with an employee stock ownership program, a stock option plan and/or a stock purchase plan, separate from the 401k plan.

For the past 12 years, Intel has contributed 12.5 percent of each employees' salary to a profit-sharing plan that invests solely in an S&P 500 index fund. Employees can contribute their own money to a 401k plan with 16 options, including Intel stock. About a third of that plan is in Intel stock. Intel also offers stock purchase and stock option plans.

Rosen, however, stops short of endorsing bills that would restrict company stock in 401k plans because they could cause companies to cut back on 401k contributions, which are voluntary.

The Pension Protection and Diversification Act of 2001, sponsored by Boxer and Sen. Jon Corzine, D-N.J., would:

• Limit to 20 percent the investment an employee can have in any one stock in his retirement plans.
• Limit to 90 days the time an employer can force an employee to hold a matching employer stock contribution.
• Reduce to 50 percent (from 100 percent) the tax deduction an employer can take on a contribution made in stock.

A separate proposal, the Pension Protection Act of 2001, sponsored by Democratic Reps. Peter Deutsch of Florida and Gene Green of Texas, would:

• Prohibit employees from putting more than 10 percent of their own 401k contributions in company stock.
• Let employees switch out of company stock acquired through a company match after three years, regardless of age.

The Profit Sharing/401k Council of America, which represents employers, is still evaluating the bills, says its president, David Wray. "We don't have a particular position, but we have a philosophical position: As far as employee contributions are concerned, that's their money; they should be able to make the decision that's right for them." Likewise, "we think it's important that employers be able to determine the amount and approach of matching contributions. Maintaining flexibility results in more companies making greater contributions."

But what about employees? Shouldn't they also have the flexibility to invest employer contributions as they see fit?

"Defined contribution plans are not just retirement plans," Wray says. "They are permitted to have non-retirement benefits." These might include aligning workers' and shareholders' interests and providing a loyal -- you might say captive -- base of shareholders.

Some critics say the proposals create needless complexity without getting at the root of the problem -- that company stock is too risky for retirement accounts. Benartzi, the UCLA professor, has a simpler solution: In 401k plans, he explains, employers must ensure that the options are prudent from a risk and reward standpoint, with one exception -- they don't have to prove company stock is prudent from a risk standpoint.

The only way employees can sue employers when company stock in their 401k plan goes down is by proving the employer knew the stock was going to fall. That's the crux of the charges in employee lawsuits against Enron, Lucent Technologies, Rite-Aid and other companies.

"Every other investment has to satisfy a diversification test," Benartzi says. "Throw away the diversification exemption for company stock and companies will not offer it, employees will not invest in it. You simplify the situation."

Companies that don't contribute stock can simply sell stock to the public and contribute the cash to retirement plans, he says.