What is 401k?
A 401k is a retirement plan offered by employer to its employees where employees can save and invest their money. Of course you employer has to offer this plan and most offer this plan or comparable other retirement plan. With your authorization, fixed money is cut from your each paycheck before tax and put into your 401k account. This account is normally held by brokerage/bank/finance company like Fidelity, Vanguard, Etrade etc.
You are allowed to contribute maximum upto $15500 for year 2007. For those with age over 50, there is extra catchup contribution limit of $5000.
On top of this your employer may match certain part of your contribution which is extra free money! Never miss that! Also it may have vesting schedule.
NOTE: Remember in 401k tax is deferred, not eliminated!