Target-date funds (TDFs) for retirement, also known as life-cycle funds, are
being offered as a simple solution to the investment task of participants in
self-directed retirement plans. A TDF is a “fund of funds”
diversified across stocks, bonds, and cash with the feature that the proportion
invested in stocks is automatically reduced as time passes. Empirical evidence
suggests that a simple TDF strategy would be an improvement over the choices
currently made by many uninformed plan participants. This article explores a way
to achieve even greater improvement for people who are very risk averse and have
high exposure to market risk through their labor.