One of the most important things to do when saving for retirement is to rebalance your holdings – usually once a year.

Rebalancing is a powerful tool. When your portfolio gets out of whack because of market gyrations, you get back to the right asset percentages by selling some of the investments that have gone up in value and buying others that have gotten cheaper. In other words, you buy low and sell high.

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Over a longer time frame, rebalancing is important because you're supposed to dial down investment risks the closer you get to your retirement date. For example, you might move more into stable bond investments rather than riskier stocks.

Trouble is, most people put their retirement plan on automatic pilot and never look at it again. The solution: Life-cycle mutual funds, which take that rebalancing burden off of investors.

Also known as target-date or target-maturity funds, life-cycle funds shift the asset allocation over time so that their investments become more conservative as the target date for retirement nears.

Life-cycle funds typically will have the retirement target date in their name, such as Vanguard's Target Retirement 2005 fund.

"They're designed to serve as one-stop-shopping options for investors with a specific time horizon in mind," said Greg Carlson, a fund analyst at research firm Morningstar Inc. "In order to provide more stability as retirement approaches, the adviser reduces a fund's equity weighting in favor of bonds as the target date draws near."

Target-date funds are typically "funds of funds," meaning they invest in other funds from within their fund family, so you don't have to do a lot of shopping around.

It sounds like a simple solution – and it is. But still, investors should keep some things in mind before jumping into such a fund.

Life-cycle funds are becoming increasingly popular. Assets in the funds totaled $70 billion in 2005, up from $44 billion in 2004 and $26 billion in 2003, according to the Investment Company Institute, the mutual-fund trade organization.

There are several reasons for that.

"They're becoming the default option in retirement plans for people who are automatically enrolled," Mr. Carlson said. "Recent legislation better cleared the way for that."

The Pension Protection Act encourages employers to automatically enroll their workers in their 401(k) plan. Companies can use life-cycle funds as a default investment if an employee doesn't pick another investment.

"The PPA will encourage the creation of more of these automatic 401(k) plans and hence will encourage the adoption of one of these qualified default options like life-cycle funds, balanced funds and managed accounts," said Christopher Jones, chief investment officer at Financial Engines Inc., an investment advisory firm.

Fifty-seven percent of employers currently offer life-cycle funds in their retirement plans, and an additional 28 percent report that they're very likely to offer the funds this year, according to Hewitt Associates, an employee-benefits and management consulting firm.

But although target-date funds have caught on with companies, they've still yet to win over many of their employees.

"In general, we are seeing more asset flows into those funds, but adoption by participants has been low," Mr. Jones said.

One big reason is that people are reluctant to put their eggs in one basket. A life-cycle fund is designed for you to put all your money in it and let its automatic-pilot features take care of your asset allocation.

"Knowledge of life-cycle funds is not ubiquitous, so not everybody understands what life-cycle funds are, how they work and how they might work for them," Mr. Jones said.

When investors do use target-date funds, it's done improperly, he said.

Some are using a life-cycle fund as "part of their overall asset allocation," Mr. Jones said.

"Most of the participation in life-cycle funds is from participants who are spreading their money around among the core options in their plan," he said. "That's not really the intended use of life-cycle funds. It's designed to be a one-fund solution, but people treat it like any other mutual fund."

People want something individually tailored for them, and that's not a life-cycle fund.

"They're not personalized, so a 2040 fund is the same for people who want to retire in 34 years from now," Mr. Jones said. "It's treating all of the people exactly the same, regardless of whether you have a defined-benefit plan, cash-balance plan, whether you're heavy in company stock. It's a product-oriented solution, so it's not able to customize itself to a particular individual."

When picking a life-cycle fund, "the most important thing is making sure the fees being charged by the product are reasonable," Mr. Jones said.

"If you can achieve the same asset allocation with the core options of the plan [with less expense], you should consider it," he said.

The median annual expense ratio for no-load life-cycle funds with target dates ranging from 2000 to 2030 and beyond ranges from 0.84 percent to 0.97 percent, according to Morningstar.

"Because target-date funds are meant to be held for very long periods, costs play a crucial role," Mr. Carlson said.

"Expense ratios for funds of funds often have two components: the price tags of the underlying holdings, as well as any fees that the fund company charges for overseeing the aggregate portfolio."

Some fund companies charge additional management fees "for the minimal effort required to occasionally adjust their asset allocations. But the better ones don't," he said.

"Given the often-hefty fixed-income weightings of target-date funds, investors should expect to pay less than they would for most pure-equity funds," Mr. Carlson said.

You need to decide whether a life-cycle fund fits your needs at all.

"Are you the kind of person who is going to be willing to put together an asset allocation and stick with the plan?" Mr. Jones said. "If not, a life-cycle fund may be the choice for you."

Look at retirement benefits provided by your employer.

"Are you holding a big portion of your account in company stock, are you involved in the company's cash-balance plan?" Mr. Jones said.

"When you are involved in a cash-balance plan, typically they pay a crediting rate, which is based on a short-term interest rate, so it acts like fixed-income exposure.

"When you have that kind of pension, you want to counterbalance that by having a higher proportion of equities in your 401(k) account," he said.

In that case, you might consider creating your own investment portfolio or selecting a stocks-oriented life-cycle fund.

Don't let the target date of a life-cycle fund lull you into complacency.

"The date is important, but you also have to look at the asset allocation and see if it fits in with your own need and risk tolerance, because funds with the same target date from different companies aren't necessarily going to have the same stock and bond allocations," said Mr. Carlson of Morningstar. "Some companies adopt different philosophies about how much an investor needs at different points in their investing lives."

For example, the T. Rowe Price Retirement 2005 fund had 54 percent of its money in stocks as of the end of last September, he said.

Compare that with the Vanguard Target Retirement 2005 fund, which had 47 percent of its investments in stocks.

"T. Rowe believes that investors need to have a pretty significant stake in equities in retirement in order to stave off the effects of inflation," Mr. Carlson said. At Vanguard, "they take a more moderate stance."

"Investors will need to consider their own risk tolerance and needs before making a choice and should avoid relying too much on short-term relative performance figures when assessing these funds," Mr. Carlson said.

Fund companies offering target-date funds can also have different ideas about what constitutes diversification, he said.

"Some boast substantial weightings in foreign stocks," Mr. Carlson said. "Many, however, provide far less foreign exposure than even the minimum 20 percent suggested by many observers."

Because most target-date funds are funds of funds, it's crucial that you evaluate the quality of the underlying funds.

"Some fund shops take a kitchen-sink approach to target-date investing, including overlapping funds with varying merits," Mr. Carlson said.

Other fund companies manage to achieve broad diversification with a limited number of funds, he said.

"We prefer target-date funds that invest only in a select number of their siblings," Mr. Carlson said. "It's difficult to see the need for much more than a dozen underlying holdings."

Here are some key questions to ask about a life-cycle fund:

"What have their returns been over time, how consistent do they beat their benchmark, what's the tenure of the managers on the fund, what are the fees?" said Brian Bruce, director of the Finance Institute and Portfolio Practicum at Southern Methodist University.

"Are they invested in a broad variety of U.S. and non-U.S. equities?"

Look back at least five years at the fund's performance.

"You want to make sure that they don't have a lot of volatility relative to the benchmark," Mr. Bruce said. "What you want for a retirement fund is something where you have consistent returns."

Don't forget to factor inflation into your retirement. A dollar today is worth more than a dollar tomorrow.

"A lot of these funds are overly conservative," Mr. Bruce said. "By the time you get to be 50 or 60 years old, think about how long you have left. On average, a 50-year-old is going to have 25 to 30 years left of expected life. A lot of these funds – for a 50-year-old – are already down to 50 percent equities."

With likely 25 or 30 years of life left, "you can withstand risk," he said. "People have more time than they think."