If your iDevice is using a version of iOS lower than 5, you will need to use iTunes on your syncing computer to perform the upgrade. Use the Apple link below as a guide for the upgrade.
Update it from iTunes on a computer as described at the bottom of this article. As it's running an iOS version prior to 5.0, there won't be an option to update from the device itself.
A second generation iPod touch can't be updated past 4.2.1, and a first past 3.1.3.