In folklore, a silver bullet can quickly kill an otherwise resilient werewolf. But real-life challenges -- such as saving for retirement -- rarely have such a straightforward solution.

Target-date funds are positioned as an easy solution for retirement savings. A target-date fund's objective is to be a single asset that adjusts itself to meet shareholders' needs at all phases of retirement savings. In the early years, when the investment timeline is long, the portfolio is optimized for gains. In the later years, closer to retirement, the portfolio of the same fund gets more conservative to protect shareholders' capital.

A couple at the couch looking at a laptop and some documents

Image source: Getty Images.

Sounds like magic, right? The trouble is, target-date funds don't always live up to their promises. These funds became wildly popular in the mid-2000s and faced their first big test in the bear market of 2007 to 2009. And this bear was as ferocious as any werewolf. In 2008, the S&P 500 declined 38.49%. The slide continued until March of 2009, when the index hit a low point of 676.53, down 52% from the beginning of 2007.

Those invested in 2000 to 2010 target-date funds should have been insulated from some of this volatility. After all, the target retirement year had either already passed or was approaching in short order. Unfortunately, many of these investors were unpleasantly surprised with big losses. In 2008, funds dated 2000 to 2010 lost an average of 22.78%. These funds fell another 5.64% on average in the first eight months of 2009.

The problem? Overly aggressive asset allocations given the short investment timelines. Some funds were too heavy in equities, and others too heavy in risky, high-yield bonds.

That history offers two big takeaways for target-date fund investors. First, funds with the same target year can have very different investment approaches. And second, if you casually picked a target-date fund without investigating its approach, tough market conditions will show you how aggressive that fund might actually be is.

In other words, now's the time to check in on your target-date funds to ensure they align with your own risk tolerance. Here's what you need to know.

Not all glide paths are the same

The formula that determines the portfolio mix relative to the target retirement date is called a glide path. Glide paths, like the funds themselves, can be conservative or aggressive. Some target-date funds reach their most conservative asset mix in the retirement year, while others are still positioned for growth into retirement -- which opens the door to volatility after the shareholder has left the workforce.

Putnam RetirementReady funds, for example, hold less than 19% in equities in the retirement year, while Vanguard target-date funds hold 50% equities in the target year. Fidelity Freedom funds and T. Rowe Price retirement funds both hold 55% equities in the retirement year.

Year-to-date performance in 2020

The table below shows how these different allocations responded to the market slide this year. You can see that the funds with a higher percentage of equities generally fared worse, but there's even variation between funds with similar allocations.

Note that the S&P 500, considered a gage for the overall stock market, was down 20% in the first quarter.

Fund

Percentage of Equities in Portfolio

Loss in the Quarter Ended in March

Putnam RetirementReady 2020 (NASDAQMUTFUND:PRRNX)

18%

(6.5%)

Vanguard Target Retirement 2020 (NASDAQMUTFUND:VTWNX)

50%

(10.7%)

Fidelity Freedom 2020 (NASDAQMUTFUND:FFFDX)

55%

(12.3%)

T. Rowe Price Retirement 2020 (NASDAQMUTFUND:TRRBX)

55%

(14.7%)

Data source: Yahoo! Finance.

Evaluating your own target-date fund

To evaluate your own target-date fund, start by checking its performance in the first quarter of this year relative to the S&P 500. If your retirement date is 15 or more years away, your fund should lean heavily toward equities. You might have kept pace with the overall market losses, or something close to it. That's to be expected, and far less worrisome than losing 20% of your portfolio just before you retire.

If your retirement date is within five years, your fund should show a decline for the quarter of less than 20%. How much less than 20% is mostly a function of how aggressive the fund's portfolio is. And while you can't undo those losses, you can use them to gauge your risk tolerance going forward.

Look to your fund's prospectus or fact sheet to find its glide path. You want to understand how the asset allocation will change over the next few years. The question for you to answer is this: Will you accept more volatility in exchange for more growth opportunity? If your answer is yes, you want a fund that has a higher percentage of equities now and moves to a more conservative profile after several years. And if the answer is no, you're better suited for a fund that's holding steady with a conservative allocation now.

Assuming you're investing within a 401(k), your choice of target-date funds is probably limited to different target years within one fund family. Thankfully, there's no rule that you must invest in a 2030 fund if that's your projected retirement year. If you want something more stable and conservative, choose an earlier year -- say, a 2025 fund. Likewise, if you want more opportunity for growth, you could choose a 2035 fund. Being comfortable with the glide path and how it relates to your timing and risk tolerance is more important than the fund's target year.

There's no silver bullet

Target-date funds are supposed to be a quick-and-easy, silver-bullet solution to retirement investing. And they do have some efficiencies. But they're not completely uniform or hands-free -- something that becomes very clear in volatile market conditions. That's why you still have to research and understand your options. Check in on your target-date funds today and make sure they work for you now and in the future.