* What are 401(k) plans? Company-sponsored retirement programs, named after a section in the Internal Revenue code, that let people sock away much larger amounts than they can in an IRA. Also, employers are allowed to contribute money on behalf of workers, and most do. * What are the tax benefits? The amount invested, by you and by your employer on your behalf, is deductible. That money then grows tax-deferred until withdrawn. * How much can a person invest? The 401(k) limit for an individual is $8,475 in 1991, with the amount adjusted annually for inflation. However, you and your employer can invest up to a combined $30,000, or 25%, of your pay, whichever is less, assuming that certain requirements are met. * How do 401(k) plans work? You select the amount you want deducted from each paycheck and decide where to invest the money from among choices made available by your employer. * Why do mutual funds make sense in 401(k) plans? With any long-term investment, you want diversification. The typical mutual fund, which holds dozens of stocks or bonds, provides this safety in numbers. Plus, the larger fund companies offer a wide selection of stock, bond and money market portfolios from which to choose-another form of diversification.

With a 401(k) plan, investment responsibility lies with each worker, not the employer. So it's your fault if, for example, you choose an aggressive growth fund that drops 20% one year. This perhaps explains why about 50% of all 401(k) money is invested in GICs, which resemble certificates of deposit except that they're issued and backed by insurance companies, not banks. "Participants have a big appetite for what they perceive as safe, fixed-income options," [John Mulligan] says. Another 20% is invested in the common stock of companies that offer 401(k) plans.