Retirement funding has been tied very closely to the stock and bond markets in an effort to provide the potential for significant growth, but now a lot of Americans are learning the realities of the downside of investing.

Here are some questions and answers about how the stock market affects your retirement savings.

Q: How are retirement accounts and the stock market linked?

A: The whole thing started in the 1970s when the government began tinkering with retirement plans. By the end of the decade, Congress had created the Internal Revenue Code section 401(k), from which many of today's retirement plans take their name.

The section authorized paycheck deductions as a way to save for retirement. The accounts grow larger as you contribute part of your salary and your employer puts some money in each year. In addition, the money is invested in stocks, bonds or other investments to help the value of your retirement fund grow.

Q: Why is it necessary to tie my retirement account to the stock market?

A: The idea behind investing retirement money in the stock market is to make the account grow faster.

The money could be invested in a bank account or safer investment products like U.S. Treasury bills or long-term Treasury bonds, which would offer annual returns in the 3 percent to 4 percent range. Over time, though, the stock market has outperformed any other investment in the United States. For example, a stock market return of 7 percent would not be unusual over a 10-year period.

The idea is that your retirement money is a long-term investment, so you're taking advantage of that higher return to have more money when you stop working. Compounding the investment over years - reinvesting the earned money to earn even more - has proved to offer significant growth.

The downside is that there are no guarantees when you invest in the stock market, which can drop significantly during economic downturns - as we've seen recently. To get the faster growth in your account, you're accepting some risk that a downturn may sweep away some of your money.

Q: Are there less risky alternatives?

A: Most advisers would say the best way to control your risk level begins with becoming involved in deciding where your money is invested within your 401(k) plan. Most 401(k) plans offer a variety of funds to invest in, typically ranging from higher risk choices that invest in volatile stocks to safer funds that put more money in bonds.

Basically, you need to strike a balance between earning potential and security. And there's no such thing as a perfect balance - only you can know how much risk you're comfortable with.

There's one principle most advisers would agree on, though. The younger you are, the wiser it is to consider riskier investments, because the stock market tends to rise over the long run and you'll have plenty of time to recover from any steep drops.

On the other hand, if your money is in high-risk stock funds when you're nearing retirement, you stand the chance of losing a large amount of money just when the time comes to start withdrawing - a situation many investors find themselves in now.

Q: What kind of impact has the meltdown had on company pension plans?

A: It's hit them hard. Because most companies invest about 60 percent of their pension plans in stocks and about 40 percent in fixed-income assets such as bonds or money market accounts, they've lost significant money.

Adrian Hartshorn, an actuary with business consultant Mercer, a division of Marsh & McLennan Companies Inc., has been tracking the pension accounts of companies in the S&P 1500. At the end of 2007 the companies collectively had a surplus in their accounts of $60 billion. As of the end of September, the combined value had fallen to a deficit of $35 billion because of stock market losses.

Without a recovery in the stock market, he said, that deficit could balloon into the hundreds of billions.

Q: Could a company's financial security be at risk if pension plans suffer from market losses?

A: Yes - in fact, the losses are already starting to hit some companies' profits.

Take defense contractors, for example. Lockheed Martin Corp., the nation's largest defense contractor, has 128,000 retirees covered by its pension plan. The plan provided a $160 million windfall to the company this year, but the stock market losses will result in a loss of $60 million next year.

At Northrop Grumman Corp., Chief Financial Officer James Palmer told analysts Wednesday that the October market dive has led to a loss of roughly 20 to 21 percent in the company's return on investment of its pension assets.

Q: Is there any chance the federal government might take over private pension plans to protect retirees, as Argentina is considering?

A: Some in Congress have begun discussions about how U.S. workers could be guaranteed more security but still see some growth in their retirement funds. The House Committee on Education and Labor is conducting hearings on the issue.