This chapter describes how human capital is equivalent to an implicit investment in bonds for an investor who knows his income in advance with perfect certainty, and argues that properly designed life-cycle funds are better default investment choices than money market funds in defined contribution (DC) pension plans. Life-cycle mutual funds are one of the fastest growing segments in the mutual fund industry. The long-standing practice of sponsors of DC pension plans choosing a money market fund as the default option for plan participants might not be appropriate if the goal is to choose a safe investment. The issuance of inflation-indexed bonds by the Treasury has a significant impact on welfare. Life-cycle funds are inexpensive to manage, and most mutual fund companies do not charge fees on top of the fees they already charge to the underlying funds.
Keywords: life-cycle funds, human capital, investment, pension plans, mutual fund industry, money market fund, income