Maybe the visual metaphor is an extreme answer to the question raised above. But asset allocation for participants investing their accounts in employer stock seems to be an investment strategy on the decline.

Asset allocation is, of course, that strategy of a 401(k) participant distributing his or her investments among different asset classes so as to diversify. It’s one of those concepts that has been de rigueur as part of 401(k) investment education.

Asset allocation seemed to be getting traction with those employees who invested in employer stock. According to a December 2008 Issue Brief, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007, published by the Employee Benefit Research Institute, those 401(k) participants continued to seek diversification of their investments.

Since the Enron debacle, the share of 401(k) accounts invested in employer stock continued to shrink, falling by 0.5% to 10.6% in 2007. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend, but they were less likely to hold employer stock.

But between then and now things changed. Earlier this month, The Wall Street Journal reported that Despite Risks, Workers Guzzle Employer Stock. The article noted a study by Hewitt Associates that in January, for the first time in more than seven years, a large group of 401(k) participants invested more money into employer stock than any other type of investment. Employees invested $65 million in employer stock that month.

Employer securities are a big part of retirement plans. According to the above-mentioned EBRI Issue Brief, almost 2/3 of 401(k) plans with more than 5,000 participants offered employer stock as an investment option in 2007. And about 8% of participants in those plans had more than 80% of their account invested in employer shares.

So how much stock is too much stock? The Financial Industry Regulatory Authority (FINRA) issued an investor alert, Putting Too Much Stock in Your Company—A 401(k) Problem. (FINRA is the non-governmental regulator for nearly 5,000 brokerage firms, and was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange).

FINRA says that says that if a participant has than 20% of his or her assets in company stock, and this investment also constitutes more than 20% of their overall investment portfolio, they should consider rebalancing their investments to increase diversification.

Many retirement experts say that is even too much, and that employees should keep no more than 5% to 10% of their balances in company stock, and some believe such shares don’t belong in retirement plans at all.

Obviously, more work needs to be done on 401(k) investment education.