Perhaps you have a point that total prohibition is a bit harsh, but certainly a limit in 10%-25% range to protect a 401-K retirement investment makes sense. Diversification of investment is key to risk management. If you were hell-bent on investing in your employer, nothing would prevent you from investing in your employer in your IRAs, or personal brokerage accounts. And then there are possibly stock options as well.

The problem with 401-Ks is that the employer has a lot to do with how it's managed, what investment choices the employee has, how often an employee can shift investments from one choice to another, etc. Especially when the employer does some "matching" contributions, they may have a coercive influence on your choices. The choices you are given, in mutual funds let's say, may not be the best in any case. Often the employer gets a kickback (although they would never call it that) from the investment manager firm (e.g. T. Rowe Price) they select. The size of kickback may influence your company whom they pick when changes are made. The point is, although technically it's your retirement money, there are many aspects of its evolution you do not control. That's the part that bothers me.