Target Date Funds Let You Invest and Forget

What does it hold? Not all target date mutual funds are created equal. When evaluating them, take a quick glance at their actual holdings. If you are a conservative investor, you want to make sure it isn't too risky and vice-versa.

Eric feels real estate is too risky and wanted to make sure that the funds he was considering did not own any real estate positions, like Fidelity Freedom 2030 Fund. Other potential risk areas are international (especially emerging markets) and high-yield bonds. Even though you are investing in one mutual fund, make sure you have looked at all the individual mutual funds within the target date mutual fund. This is easily found on the mutual fund's home page.

Are they all built alike? Target date funds are only as good as the sum of their parts. There are two easy screening methods you should employ when considering which ones to buy:

1. Make sure they are rated 4 or 5 stars by Morningstar, which measures the risk of the mutual fund based on performance and fees compared with similar mutual funds. Two five-star target date mutual funds: American Century LIVESTRONG 2035(ARYAX Quote) and Schwab Target 2030.

2. Check the expense ratio, the annual fee you pay for the manager and other administrative expenses, regardless of the fund's performance. Every mutual fund has an expense ratio and you want to make sure yours is as low as possible. If Elizabeth invests $10,000 in her Roth IRA, the Vanguard Target Retirement 2030(VTHRX Quote), which has an expense ratio of only 0.21% annually, will only cost her $21 per year, leaving the remaining $9,979 to be invested. Higher expense ratios mean less money for you. Another low expense fund is T. Rowe Price Retirement 2030, with a 0.72% expense ratio. These are two of the lowest in the industry.