401K : is it a total fraud

[sishya]

Friends,

I have a few questions about 401K.
Wondering if 401K is a net negative for an employee.

Assume the following

Employee contribution : $ 5000
Employer contribution : $ 2500

Total value of 401K Now : $ 4000 (due to stock market loss)
If I take a distribution, I have to pay taxes(20%) as well as 10% pre-payment penalty ie

Take Home : $ 4000 - $ 800 - $ 400 = $ 2800 even though
the 401K had a loss. Why is that ? Also see, if Employee had not contributed anything into 401K but just paid tax on $ 5000, it would have resulted in the higher amount = $ 4000 since only tax is paid.

So it looks like probably 401K contributions have contributed to less inflation and also in the process stealing our money.
- Is it a total fraud ?
- Also why pay penalty and tax when 401K is under loss. I don't know if this is true, probably someone more knowledgeable can comment.