401k plans are tax shelters. These retirement accounts are always sponsored by your employer. This means that the retirement plan is a plan that you must contribute to through an employer. Once you leave your employer, you may take your 401k plan with you. But, if you die prior to using the money, you should understand what happens to the money.
Process
When you first sign up to make contributions to your 401k plan, you'll be asked to name a beneficiary on the account. The beneficiary is a person you trust that will take the proceeds of your account after your death. The beneficiary is normally your spouse or your children, but you may also leave the money to a charitable organization.
Significance
If you die before you are allowed to take normal distributions, your 401k plan is passed on to your beneficiary. If the beneficiary is your spouse, then she may treat the 401k plan as though it was her own. If the 401k is passed on to anyone other than your spouse, then he will have to take distributions from the account within a year of your death.
Benefit
The benefit of being able to name a beneficiary is that you won't have to worry about what happens to your money after you die. You won't lose the money, and your employer won't take your retirement savings. This money may be used by your beneficiaries for any purpose -- even as a way to help them save for their own retirement.
Warning
If you do not name a beneficiary, the funds will be paid to your estate. While this is better than losing the money, the funds may be subject to expensive probate fees. Additionally, the funds may be tied up in probate if your estate is large. This will delay the process of transferring your 401k to your heirs.