Say you have "child.dwg", and it has a bunch of layers in it, and they are all RED.
Now say you have "parent.dwg" and you xref in "child.dwg". When you first create the reference, all of the layers in "child.dwg" (as viewed as a reference in "parent.dwg") will be red.
Now say that in "parent.dwg", you change the color of all of the reference layers in "child.dwg" to green.
You save "parent.dwg", close it, then reopen it.
If VISRETAIN is set to 1 in "parent.dwg", when you reopen it, all of the "child.dwg" layers will still be green.
If VISRETAIN is set to 0 in "parent.dwg", when you reopen it, all of the "child.dwg" layers will revert to red
I just used color as an example, but the same thing applies to other layer properties.