Yes, it's against the law. I'm not an expert on the laws that govern retirement plan but I recall that tax legislation passed in 2003 (EGTRRA) requires that the employer to forward employees' 401(k) contributions to the Plan Trustee within two weeks. If your employer has divered employee contributions into the general assets of the company, they are in big trouble.
You can contact the federal Department of Labor to discuss this and file a complaint if need be. 202-693-4650