(Money Magazine) — Rarely has a sensible investment caught on as quickly as the target-date retirement fund. These all-in-one portfolios of stock and bond funds diversify you instantly, automatically keep your portfolio in balance and gradually shift you to a more conservative asset mix as you get closer to retirement age.

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Its a pitch thats won over millions of people and their employers. Assets in target funds (or life-cycle funds, as theyre also known) hit $114 billion in 2006, up from $12 billion in 2001. Most of that money came from 401(k) plans and IRAs. There are now nearly 200 target funds to choose from, too: 49 launched in 2006.

And theres more to come. Last years Pension Protection Act gave employers the all-clear to put you into a target fund if you dont pick your own 401(k) investments. Within five to 10 years, predicts Ted Benna, founder of the 401(k) plan, 75 percent of plan assets will be invested in target funds.

All of which is great – to a point. Target funds are a terrific solution if you are new to the market or dont want to manage your own portfolio. Money Magazine started recommending them in 2004. Studies show that, on average, target funds provide better diversification and higher returns than most of us can manage on our own.

But that doesnt mean the funds are right for every situation. Owning one of them can make it tough to coordinate between your own and your spouses multiple portfolios.

Moreover, target funds arent created equal. Many companies use these funds of funds as an opportunity to layer extra costs on top of the expenses for the individual component funds. Some are poorly designed or overly complicated. And choosing one based solely on your age can be a bad move.

So how do you know whether to pick a target fund or choose your own funds? And if a target fund makes sense for you, how do you know if your companys 401(k) choices, or the ones youre considering for your IRA rollover, are right for you? Heres what you need to be aware of, plus some guidelines on how to make a choice that hits the bulls-eye.

No two life-cycle funds invest the same way for the same retirement date. AllianceBernstein 2045 Retirement Strategy, for example, holds an aggressive 100 percent of assets in equities; other companies take a more moderate tack. And some funds are diversifying into more exotic asset classes. AIM Independence 2020 holds stakes in global real estate as well as foreign and floating-rate bonds.

High-octane mixes offer great growth prospects but are too risky for people who want steadier returns and a portfolio they dont need to worry about – which, after all, is the point of target funds.

Moderate portfolios, such as those offered by the T. Rowe Price and Vanguard target series, which are included in ourMoney 70 list of top funds, make more sense.

T. Rowe Price Retirement 2020, for example, recently held a mix of 77 percent stocks and 23 percent bonds, a formula geared to deliver growth without too much risk. If your 401(k) doesnt offer T. Rowe Price or Vanguard funds, choose a fund with a target retirement date that most closely matches the T. Rowe Price or Vanguard allocations for your actual retirement date.

To stand out from their competitors, many fund families are doing what they always do: making things more complicated. For example, the Russell LifePoints funds retain as many as 40 advisory firms for each portfolio. Fidelity Freedom 2015 holds 25 funds, including three large-stock growth funds, two small-stock growth funds and five foreign funds.

These arrangements can create too much overlap, says Morningstar analyst Greg Carlson. You could well end up, at best, with index-like performance at the higher cost of active management.

Part of the problem is a lack of consensus about the best way to design a lifecycle fund. Target funds are relatively new, notes David Wray, head of the Profit Sharing/401(k) Council of America. As research moves ahead and theres more experience with how people use these funds, there will be more agreement about what works best.

Maybe. But what do you do in the meantime? Follow these four guidelines:

Costs count- Expenses are the crucial factor in performance: the higher the fees, the less youll earn in returns. Many target funds levy hefty fees, especially those sold through brokers. Take SunAmerica 2010 High Watermark C, which charges yearly expenses of 2.3 percent of assets, plus a 1 percent redemption fee. The T. Rowe and Vanguard target funds charge an average of 0.72 percent and 0.21 percent, respectively. If your 401(k) offers a high-priced lineup of target funds, skip the following paragraph.

Look beyond the funds date- Check out its asset mix instead because the fund with your retirement date may not be best for you. It depends on whether the asset mix suits your taste for risk. So check the allocations detailed in the funds prospectus and compare them with a well-diversified mix, such as T. Rowe Prices or Vanguards. If you prefer to stash more in stocks, or less, choose a fund with a retirement date that more closely matches your desired allocation rather than your age.

You can do it yourself- If your 401(k) offers only costly target funds, or none at all, you can assemble a simple portfolio that you need to think about just once a year. Choose the least expensive U.S. stock, bond and foreign stock funds in your plan. Theyll usually be index funds or big actively managed funds that will diversify you adequately. Then divvy up your contributions.

Say youre a 40-year-old of moderate temperament. You start with 50 percent in the U.S. stock fund, 20 percent in the foreign fund and 30 percent in the bond fund. Every Jan. 2, call the plans 800-number and ask to have your portfolio rebalanced. Every other year, shave a percentage point off your U.S. stock fund target, moving it to bonds.

If your plan has only high-priced funds, then save just enough in your 401(k) to get your employers full matching contribution. Put the rest into a low-cost target fund in an IRA or a taxable account.

Dont hesitate to graduate- As your savings grow, a target fund or simple three-fund portfolio will no longer cut it. You may have company stock and options, so youll want to diversify away from your industry, for example. Or you may want to design a portfolio that encompasses your 401(k), your taxable savings and your spouses portfolio.

Move on. But if youre just getting started – or youve decided you really would rather keep your investing on autopilot – a solid target fund will hit the mark.

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