SEATTLE (MarketWatch) -- Mutual funds' Achilles' heel is a bear market. Your 401(k) has an Achilles' heel too: mutual funds.

Most mutual funds families' fund prospectuses state they will do nothing to protect shareholders' assets from a bear market. They will not sell stocks short, go to cash, or hedge against obvious risks.

This meant that older workers with larger retirement savings lost heavily in the three-year 2000-2002 bear market. After that traumatic experience, it took the unlikely discipline of staying fully invested for the next five years simply to break even.

...Here we go again down that slippery slope

In the past 10 months, the Dow Jones Industrial Average DJIA, -0.47% has fallen about 17%, the U.S. dollar index is down about 6%, and inflation as measured by the CPI (all items) is rising at a 4.9% annualized rate. That means that in just 10 months investors' wealth has been eroded almost as much as it was during the entire three-year bear market.

The difference this time is that the recession and the bear market are just beginning -- one year after the credit crisis news broke. Different markets require different strategies.

Get your priorities straight

Given that your employer probably won't be making any substantial changes to your 401(k) plan soon, you and your fellow employees may want to take some actions to protect your savings and embrace investments more appropriate to a bear market.

Your priorities should be:

(1) Shift investments in the 401(k) to the safety of cash until you can decide where more productive investments might be.

(2) See if your plan offers Rydex or ProFunds bull and bear market funds.

(3) Put your savings in a self-directed brokerage account if the plan offers such an option.

(4) Even better, find out if an in-service rollover to a self-directed IRA is available.

(5) Ask your human resources department to enlist an independent accountant and investment adviser experienced in bear-market investing to counsel workers. Don't accept a representative of the fund family that is losing you money. "Stay the course" and "think long-term" are not good advice to employees who don't have a long-term left. (This recession could take you as long as a decade to experience and recover your losses; the last bear market took eight and one half years to unfold and recover.)

(6) Start an investment club to educate employees about how to survive this bear market. For example, you might want to discuss why, when you are hearing about the oil companies' obscene profits, your 401(k) plan doesn't have an energy-sector fund for you to invest in.

Head your employer off at the pass!

Some employers are considering dropping the incentive of matching employer contributions when they implement automatic (just say "No" or "negative option") enrollment plans that will require you to participate unless you opt out.

Congress has approved so-called lifecycle or target maturity funds as default investments if you do not make another choice. These unproven funds start out with a larger allocation to stocks and increase the allocation to bonds as you approach the target maturity.

Target maturity funds are largely unproven (32 have 10-year track records and the best only averaged 4.88% over a full investment cycle of bull and bear market years), and have on average lost almost 8% in the first six months of 2008.

More importantly, interest rates are at or near historic lows and are more likely to rise than fall over the coming decades, guaranteeing that the increasing bond allocation will be a losing proposition as time goes by.

Once again, most plans offer no provisions to even try to profit during bear markets.

Finally, if your employer is laying off staff, having difficulty getting bank financing or otherwise having financial troubles, that's a clear sign that you should not be investing in company stock.

The revolution begins

Post this column on a bulletin board at work and email the link to your friends.

It's time to assemble the wisest investors in your company and schedule a meeting with the Plan trustees and the human resources staff, perhaps with the supporting attendance of the corporate treasurer to attach credibility to the discussion.

This week would be a good week to start scheduling such a meeting and formulating strategy on how to deal with the very real possibility of a prolonged bear market standing between you and your retirement.

It's your money in your 401(k) plan and no one from your employer will be ready to bail you out in retirement. Now is the time for all good employees to protect their interests and make retirement savings an employee benefit that benefits employees.