Depending on where you work, your 401(k) will be different. Most 401(k)s consist of an array of mutual funds and stocks. Mutual Funds are essentially a collection of stocks. Stocks are shares of a corporation. In other words, by owning a stock, you own part of a corporation and benefit from that corporation's success and are hurt by that corporation's downfalls.
Usually, though, the stocks offered in your 401(k) plan are your company's stock. Investing in company stock should ALWAYS be avoided. It is not a good idea to have your retirement savings and your job depend on one company. In fact, it's not even a good idea to invest in individual stocks. By investing in Mutual Funds, you simultaneously invest in many stocks and thus reduce your risk of losing money.
The Mutual Funds in your company's 401(k) plan will vary based on their goals. Some Mutual Funds are aimed for long-term growth and some are aimed for short-term growth. The difference is that long-term growth is more risky but there is opportunity for more return on your investment, while short-term growth is geared towards less risky stocks that consequently return less on average. Depending on your age, you should decide how risky you want to be.
If you're 50 or over, you should primarily invest in less-risky short-term mutual funds within your 401(k). If you're around twenty, you should probably invest in mostly long-term more-risky mutual funds in your 401(k).
The best part about a 401(k) plan is the employer match. Not all do this, but some employers match your contribution to your 401(k) account up to a certain percentage. For example, your employer may match 50% of your contribution for 5% of your salary. If you make $20,000 per year and deposit 10% of this into your 401(k) plan, then your employer will match the first 5% with 50%. Meaning your employer will have contributed $500 into your 401(k) plan (50% of $1000, which is 5% of your salary).
The second benefit to a 401(k) plan is that any income deposited into your 401(k) goes in tax-free and is deductible. Tax-free investments grow much quicker and end up being much more than taxed-investments even if you are taxed upon withdrawal.
You should always take advantage of your 401(k) plan, especially if your employer matches your contribution.
