Types

• There are two types of 401k plans that are protected by law. The first type of 401k plans, known as a traditional 401k plan, is a retirement plan that allows you to contribute pretax contributions to the account. Money is taxed when you remove it from the account. A Roth 401k plan is a retirement plan that only allows after-tax contributions. Money is tax-free when you withdraw it from the Roth.
  
  

Significance

• The significance of a 401k plan is that it is protected by the Employee Retirement Income Security Act, also known as ERISA. ERISA specifies guidelines for employers that they must meet when establishing 401k plans. In addition to this, all payments are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). The PBGC does not guarantee a specific retirement account balance or payment. Instead, it simply guarantees that the money in your 401k plan will be paid out to you.
  
  

Benefit

• The benefit of ERISA and the PBGC is that you never have to worry about whether or not your retirement will be there for you when you need it. Because the money in your account is guaranteed to be paid to you, you can focus on investing for your future instead of making sure the financial institutions you work with are financially sound. In a sense, this simplifies the process of retirement planning, since you are assured that you won't lose your retirement if the financial institution holding your money goes bankrupt.
  
  

Disadvantage

• The disadvantage of all of these protections is that they come with rules and limitations. Your 401k plan is an employer sponsored plan. This means that you can only invest in a 401k plan through your employer. Additionally, you are restricted from taking money out of your plan or splitting your retirement with another person like your spouse. Generally, money must remain in your account unless certain conditions exist that allow you to take money from your account early--for instance, to pay for certain medical bills, to buy a home, if you become totally disabled, or you want to pay for college expenses. You may borrow up to $50,000 from your 401k plan, but this money must be paid back with interest.