Target-date mutual funds sound like no-brainer investments.

They have set target dates, usually matched to an investor's target retirement year. As the target date nears, say 2020, investment allocations are slowly switched from equities to bonds and cash for capital preservation.

In reality, the 40 target-date mutual fund families vary widely, having different fees, structures and even holdings. Here's how to evaluate them.

"Not all funds work the same, despite having similar target dates," says Eric Schaefer, chief of investment products at money-management firm American Independence Financial Services in New York. "That's one gotcha that trips people up."
'To' versus 'through' funds

The way target-date funds are structured can be confusing to investors. Some have a glide path "to" the fund's target date. Others have a glide path "through" the fund's target date.

"To" funds pare down equity holdings as the retirement date nears, shifting into more cash and bonds. When the target date is reached, some funds are converted to retirement-income funds or an annuity, while others keep assets in the same fund, according to Morningstar.

"Through" target-date funds, which are more prevalent, manage asset allocation past the target date and through the investor's retirement. They usually hold many more equities than target-date funds that run to the retirement date, according to Morningstar.

The target date is a person's projected date of retirement, but "through" funds assume that investors will stay invested after the target date is reached.

"'Through' funds assume that you'll invest until you die," says Roger Wohlner, a Certified Financial Planner professional with Asset Strategy Consultants in Arlington Heights, Ill.

For example, T. Rowe Price's target-date funds have "through" investing dates. "These funds are designed for people with retirement goals," says Jerome Clark, portfolio manager of the T. Rowe Price Retirement Funds. So, the equity allocation is about 55% near the target date, according to T. Rowe Price.

Nearly all target-fund assets are stashed in retirement funds such as 401(k)s. The reason: They're a cheap way to broadly diversify a portfolio, Schaefer says. But that doesn't mean that target-date funds can't be harnessed to meet set individual investment goals, such as saving money for a child's college or for making large purchases, he says.
Target-date fund factors

Even so, target-date funds are not one-size-fits-all investments. Here's why.

You may not really understand the workings of a particular target-date fund. According to a survey by the Securities and Exchange Commission released earlier this year, many investors don't fully understand how target-date funds operate.

And fund prospectuses don't always help. Target-date funds' disclosure "still falls short in several key areas," according to the Morningstar report.

That's why Schaefer recommends spending two hours checking out a target-date fund before deciding to invest. "Look at the fund's philosophy and risks, and then match them against your own," he says.

Equity allocations vary widely among funds. For shorter-duration funds, investment allocations vary widely, according to Morningstar. Though funds with 2015 target dates held 52% of their holdings in equities on average, one 2015 fund's equity allocation was 20% while another's was 78%, according to the report.

"Two or three target-date funds could have vastly different profiles," Wohlner says. "So look at their overall percent of asset allocations."

Big fund companies issue most funds. The top three fund companies -- Vanguard, Fidelity Investments and T. Rowe Price -- command 75% of target-date assets, according to Morningstar. "So there are some good funds that may not be getting as much exposure," says Josh Charlson, senior mutual fund analyst for Morningstar.

Also, these big funds usually offer a fund of funds, where various existing mutual fund offerings are bundled together into one target year. These may be existing funds that already have been sold to the firm's regular mutual fund customers. "So target-fund quality depends on the quality of the underlying funds," Wohlner says.

Lately, though, investors can opt for more index-based funds. Eleven all-index funds are now being offered by companies such as Vanguard and BlackRock, which are lower-cost funds. Annual expenses for index target-date funds are less than 20 basis points compared to 0.72% for average target-date funds, according to financial information firm BrightScope in San Diego.

"Target-date fund expenses are always important because they can make a big difference in your return," Charlson says.

Funds may underperform. Think that target-date funds -- even a fund of funds -- perform well in good and bad markets because they're highly diversified? Think again. The target-date fund category trailed the Standard & Poor's 500 index in 2011, according to Morningstar. For example, the 2016-2020 funds had a negative 0.22% loss versus a 2.1% gain for the S&P 500 in 2011.

And when the market nose-dived in 2008, some 2010 target-date funds dropped 41% that year, losing more ground than the S&P 500.

"If you expect a low risk of losing money in target-date funds, you'll be disappointed," Charlson says.

Your investment may be underfunded. People aren't saving enough money for retirement, Wohlner says. So, they may be underfunding their target-date funds, too. "Look at the fund and determine if your investment is appropriate," he says.

In any case, don't just count on target-date funds as your total retirement investment. "They're not a silver bullet," Charlson says.