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You wrote, So you are saying if you invest 6% in any option available in your 401k, the company matches with the same amount in company stock and you don't have to purchase any company stock yourself? That's what we Fools call Free Money. Your cost basis is zero. Instant profit.

Cost basis is only really useful when accounting for capital gains. Capital gains are only meaningful when calculating taxes. In a tax-advantaged account, cost basis can be used to determine your total investment performance (capital gain or loss), but that really provides little useful value. But if you feel you need to track it, I would say you need to include the value of the employer match as part of the basis.

Even so, performance of an investment portfolio should be relative to some metric over a fixed interval - not relative to its cost basis. If you're really concerned about cost basis, I'd worry that you can't afford a loss of principal which would really restrict your investment options.

Also, So by all means, contribute 6% in a investment in which you believe to continue to accumulate your free shares.

I would recommend the OP develop a strategy of selling these shares from time to time. In the past, I've just set up my 401(k) to re-balance periodically in order to keep the ratio of company stock roughly the same over time. This forces you to buy company stock out of your own funds during down months/quarters/whatever and sell during up months/quarters/whatever - which is the entire point of re-balancing a portfolio.

Of course that begs the question, If he were considering his own employer's stock as an investment, would he buy it? If not, why should continue to hold it? He should also strive to understand his holding restrictions on his employer's stock. If he doesn't have a holding restriction on unvested shares, he might want to sell them immediately after the contribution and just use the funds as part of his regular portfolio.

For instance my employer offers direct company stock purchases in its 401k plan. However, the company match does not have to go to company stock. It might be the default option, but I can (and do) direct the funds elsewhere. To accommodate this, the fiduciary simply keeps track of the ratio of vested contributions to unvested contributions and assigns a value to any unvested portion. (The unvested portion being the amount that would be returned to your employer should your employment end today.)

- Joel
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