In your company 401(k) retirement plan, you're offered a menu of mutual funds and other investments. How do you decide which ones to choose?

In theory, you consider your age and risk tolerance and split your money accordingly between stocks and bonds.

Young or aggressive investors should lean more toward stocks. Stock investments should be subdivided between big stocks and small ones, with something for international stocks, if your 401(k) plan allows it.

In real life, however, you may not act so logically, according to two professors who study investor behavior. You try to diversify your investments but may not know how to do it well.

As a result, your actual mix of stocks and bonds may depend on the types of investments your 401(k) plan happens to offer, rather than on your own rational choice.

These conclusions come from a recently published paper by Richard Thaler of the University of Chicago and Schlomo Benartzi of the University of California at Los Angeles. They studied a number of 401(k) plans and ran some experiments on how investors make their investment choices.

Some employees "diversify" by spreading their money over all the investments available in their 401(k). This is especially true of plans with small numbers of funds.

As a simple example, say that your plan offers four mutual funds--two stock funds and two bond funds. Following a rule of thumb, you might put 25 percent of your money in each. In that case, you'd be 50 percent invested in stocks.

If you're offered three stock funds and one bond fund, you might again put 25 percent of your money in each. But now you'd have 75 percent of your money invested in stocks. If one of these stock funds is actually a balanced fund--half in stocks, half in bonds--you would be 62.5 percent invested in stocks.

In this way, the size of your stock investment becomes a byproduct of the types of funds offered. The more stock funds in a 401(k) relative to bond funds, the more heavily its participants invest in stocks, Thaler and Benartzi found.

Why do workers behave this way? Maybe because they assume their employer provides a good investment mix. But that's not necessarily so.

Furthermore, what's right for some workers is wrong for others. "Employees need more advice on how to allocate their assets and how much to save," Benartzi says.

They especially need help with international diversification. Even a worker whose strategy is to buy all the funds in the 401(k) may skip the international fund. In the plans studied by Thaler and Benartzi, employees invested only 2.3 percent to 3.5 percent of their assets there.

While workers tend to underinvest in international stocks, they overinvest in the stock of the company they work for.

Company stock is available to 53 percent of 401(k) participants, according to the Spectrem Group in Windsor, Conn.

In the plans studied, this stock accounted for 42 percent of the workers' assets.

That's enormously risky. In this bull market, the stock may be doing well. But in a bear market, or if your company gets in trouble, a chunk of your retirement fund could go down the drain.

Ideally, workers should count their company stock as part of their total stock allocation.

For example, say you want to hold 60 percent of your 401(k) in stocks. Forty percent has been invested in company stock. In that case, no more than another 20 percent should go into your plan's stock-owning mutual funds. The rest should go into a bond fund.

But that's not the way employees act. In a peculiar bit of mental accounting, they treat company stock as a separate investment. The rest of their money goes into the mutual funds in the plan as if this stock account did not exist.

As a result, workers in 401(k) plans that offer company stock own a higher percentage of equities than workers in plans with no company stock. Company stock plans are riskier plans, and yet many workers feel that their stock is "safe."

Are workers hurt when they diversify by rule of thumb? Not necessarily. Your thumb could create an investment mix that's exactly right.

But that's pure chance. Some workers are taking too much investment risk today, others are taking too little. And employers don't realize the extent to which the funds they offer skew their workers' investment decisions.

Everyone needs more help in handling 401(k)s.