New Act Shifts 401(k) Risk: Fiduciaries Off the Hook for Prudence in Self-Directed Brokerage Windows

The “Financial Freedom Act of 2025” is making a significant change to how your 401(k) or other self-directed retirement plans are managed, specifically targeting the rules for plan managers, known as fiduciaries. If your retirement plan allows you to pick your own investments, the fiduciary is no longer required to favor or disfavor any specific type of investment. Instead, they must only judge options based on their risk-to-return profile, with the goal of offering a suitable variety of choices for your retirement benefits, according to Section 2.

The Brokerage Window Loophole

This bill introduces a major shift concerning “self-directed brokerage windows.” This is the feature in some 401(k)s that lets you access almost the entire public market—think of it as a separate investment account inside your 401(k). The Act explicitly bars the Secretary of Labor from issuing any rules that would restrict or ban the types of investments you can choose inside that window. This is a big deal because it essentially removes a layer of regulatory oversight meant to protect participants from overly risky or complex products.

Prudence and Diversification: Out the Window?

Here’s where the rubber meets the road for anyone who uses a self-directed window: When a plan offers this feature, the bill states that the fiduciary (the plan manager) and you (the participant) are considered to have met the usual ERISA rules about acting prudently and diversifying investments. This is a massive change. Normally, ERISA requires investments to be prudent and diversified to protect retirement savings. Under this bill, if you, say, put all your 401(k) money into a single, highly speculative stock using the brokerage window, the law essentially says you and the plan manager have still met the prudence and diversification requirements. The risk of making a bad, undiversified bet shifts almost entirely to the individual participant, shielded by the statutory language.

What This Means for Your Retirement

For the active, sophisticated investor, this could be a win, offering maximum flexibility and access to investment products previously restricted by plan fiduciaries. This aligns with the bill’s name, promoting “Financial Freedom.” However, for the average employee who might only dabble in investing, this provision creates a high-stakes situation. By removing the legal requirement for prudence and diversification when using the brokerage window, the bill removes a critical safeguard. If you make a disastrous investment choice in that window, you can’t easily turn around and sue the plan fiduciary for failing to protect your savings, as the law now states they’ve met their duty just by offering the window. It’s important to note that the general fiduciary rules still apply to the window, but the specific, protective requirements for prudence and diversification are explicitly waived for the investments chosen inside it.