A: A 401(k) plan is a retirement savings plan that is funded by employee contributions and (often) matching contributions from the employer.

The major attraction of these plans is that the contributions are taken from pre-tax salary, and the funds grow tax-free until withdrawn. Also, the plans are (to some extent) self-directed, and they are portable. You can take the 401(k) assets with you when you leave you employer.

There are many advantages to 401(k) plans. First, since the employee is allowed to contribute to his/her 401(k) with pre-tax money, it reduces the amount of tax paid out of each pay check.

Second, all employer contributions and any growth in the capital grow tax-free until withdrawal. The compounding effect of consistent periodic contributions over the period of 20 or 30 years is quite dramatic.

Third, the employee can decide where to direct future contributions and/or current savings, giving much control over the investments to the employee.

Fourth, if your company matches your contributions, it's like getting extra money on top of your salary.

Fifth, unlike a pension, all contributions can be moved from one company's plan to the next company's plan, or a special IRA, should a participant change jobs.

Sixth, because the program is a personal investment program for your retirement, it is protected by pension (ERISA) laws, which means that the benefits may not be used as security for loans outside the program. This includes the additional protection of the funds from garnishment or attachment by creditors or assigned to anyone else, except in the case of domestic relations court cases dealing with divorce decree or child support orders.

Finally, while the 401(k) is similar in nature to an IRA, an IRA won't enjoy any matching company contributions, and personal IRA contributions are subject to much lower limits.

There are, of course, a few disadvantages associated with 401(k) plans. First, it is difficult (or at least expensive) to access your 401(k) savings before age 59 1/2 (but see below). Second, 401(k) plans don't have the luxury of being insured by the Pension Benefit Guaranty Corporation (PBGC). (But then again, some pensions don't enjoy this luxury either.) Third, employer contributions are usually not vested (i.e., do not become the property of the employee) until a number of years have passed.

Participants in a 401(k) plan generally have a decent number of different investment options, nearly all cases a menu of mutual funds. These funds usually include a money market, bond funds of varying maturities (short, intermediate, long term), company stock, mutual fund, US Series EE Savings Bonds, and others.

The employee chooses how to invest the savings and is typically allowed to change where current savings are invested and/or where future contributions will go a specific number of times a year. This may be quarterly, bi-monthly, or some similar time period. The employee is also typically allowed to stop contributions at any time.

Oh, and by the way, yes you should participate in your company's 401(k) plan. It is one of the best ways to save money for your retirement.