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A year ago you picked the 2040 fund in your 401(k) plan. It was advertised as the easy, auto-pilot choice for someone with a little more than 30 years left until retirement. Best yet, the fund slowly grows more conservative as you close in on the year 2040, protecting you from being too aggressive as you approach retirement.

What could go wrong?

Quite a bit -- based on the performance you've experienced in 2008. Your target date fund is likely well diversified amongst the various asset categories, but diversification doesn't add a lot of value when everything is down. It's a rare occurrence, but it's absolutely true that all segments of the U.S. stock market are down year-to-date. On top of our domestic woes, we find that the foreign markets, whether developed or developing, are also significantly down in 2008 (some much more so than the U.S. markets).

Keep in mind that your 2040 fund is counting on the fact that you'll continue to work for more than 30 years before you need to withdraw the funds. With that lengthy time frame in mind it has likely placed more than 85% of its assets in the stock market (foreign and domestic). Even the smidgen currently invested in bonds isn't free from harm, as a lack of faith in corporations has dealt a significant blow to the value of corporate bonds.

In fact, the only major investment categories typically found in 401(k) menus not down this year are money market, stable value and government bond funds. Because these categories take so little risk, they generally pay the lowest returns. That's even more so the case in 2008 as the buying pressure being put on money market and government bond funds has driven their yields to levels where the return is akin to burying it in your backyard (assuming that your backyard is backed by the government).

Your 2040 fund will almost certainly not sell its holdings in the stock market and turn to money market and bond funds. Your fund was built around the idea that stocks will outperform bonds and cash in the long haul. Your 30-year period definitely fits anyone's definition of a long haul so stocks will make up the majority of the fund until well in to the 2030s. In fact, your 2040 fund manager is likely looking upon this as a fantastic buying opportunity with so many stocks at prices that haven't been seen in years.

Does your 2040 fund manager's dedication to his methodology give you comfort? Probably not at the moment - and that won't change until the stock market finally stops going down. You should brace yourself for the fact that a prolonged downturn in the stock market likely means that your fund will continue to lose its value for some time to come.

None of this sounds like good news. That is, unless you agree with the manager of your fund. If you do, then it's fair to say that you too feel that this is a fantastic buying opportunity and you're more than willing to continue to buy more shares of the fund as this will only add to your gain when this market cycle comes to a merciful conclusion.

What if you don't agree with your fund manager and instead believe that these market conditions will continue indefinitely? If that's the case you have some hard choices to make. You can sell your remaining assets in the 2040 fund and move to something significantly safer like money market, stable value or government bond funds. Once you sell, you've locked in your rather significant loss and you will never see that money again. You will also earn a rate on your assets that, if you're lucky, might keep up with the rate of inflation. Maybe.

You have other options as well. For example, you may have chosen the 2040 fund because it fits your age but find that it simply takes too much risk for your comfort. If that's the case you may consider keeping your existing assets within the 2040 fund but putting new contributions to a version of the fund - let's say the 2015 fund - that probably has 20 - 25% less invested in the stock market. No, the 2015 fund doesn't match your age but it might match your risk tolerance. More importantly, it will still continue to make purchases into the stock market (albeit on a smaller scale) so you'll be able to participate in the upside if the markets ever return to normal. Keep in mind that the 2015 fund will likely have the majority of its assets in bonds and cash shortly as it's meant for people who are retiring in six or seven years.

Another more conservative option would involve keeping your remaining assets where they are (in the 2040 fund) but placing new contributions in a money market, stable value or government bond fund. This alternative would still allow your existing assets to regain their value if/when the markets cooperate but will put new money in a relatively safe spot.

None of these options are easy but it's your money and, whether you like it or not, your decision.

I should also point out that the percentages I've referenced here regarding the amounts invested in stocks and bonds are true of many target date funds. That said, there are a host of vendors offerings these funds and many have deliberately chosen a more aggressive or conservative mix of stocks and bonds (known as the "glide path") for their particular target date funds.

Finally, there is an option that none of us wish to consider but is readily available - delaying our retirement date. You may own quite a bit of the 2040 fund but may have assets that actually put you on track for retirement in the year 2050.

Let's hope not.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

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