I've got the same vehicle, but with a truck bed instead of an SUV body:)
4WD definitely has its place and 4WD is great IF YOU NEED IT. Where I live in So Cal, I would never use 4wd, and have never had the occasion on the road or camping where I needed it. Some folks do need it and I'm by all means not anti-4wd.
Yes, it does reduce mpg by a small amount. Yes, they are more prone to mechanical problems because there is more going on, and more to maintain, ie, you are carrying around more gear, which is great if you need that capability.
Sorry, but I can't answer the question about the flex fuel as I don't use it. My two cents; if you need 4wd, get it. If you will not use it, go for the 2wd Sequoia.