New Retirement Bill Reduces Liability for 401(k) Managers Offering Risky Investments

The Financial Freedom Act of 2025 is taking aim at the rules governing your 401(k) or other employee-directed retirement plans. Specifically, Section 2 loosens the legal requirements—known as fiduciary duties—for the folks managing those plans when you, the participant, get to pick your own investments from a menu.

The New Rules of the Menu

Right now, plan managers have a heavy legal responsibility to ensure the investment menu they offer is prudent and diversified. This bill changes that. If your plan allows you to control your investments, the manager no longer has to favor or disfavor any specific investment type (like stocks versus bonds) unless it’s based strictly on the investment’s risk versus its potential return. They just need to offer a “broad range” of choices suitable for retirement savings. For the average employee, this means the investment options on your 401(k) could become much wider, but also potentially less vetted by the plan manager.

The Self-Directed Wild West

The biggest change comes if your plan offers a “self-directed brokerage window.” This is essentially a feature that lets you trade almost anything you want, like having a personal brokerage account inside your 401(k). Under this bill, if a plan manager offers this window, they are explicitly shielded from liability for failing to meet two critical existing rules: the requirement to diversify investments and the requirement to act prudently. Think about that for a second: the plan manager can offer you access to highly speculative, non-diversified assets—say, a single volatile stock or maybe even unvetted private placements—and they cannot be sued for failing to act prudently or diversify just because they offered that trading window.

Less Oversight, More Risk for Savers

For busy people trying to save for retirement, this shift is a double-edged sword. On one hand, if you’re a sophisticated investor who wants access to specific assets not usually available in a standard 401(k) menu, this is great news. You get more flexibility. On the other hand, the vast majority of 401(k) participants rely on the plan manager to act as a gatekeeper, ensuring the options offered are generally safe and appropriate. By removing the threat of liability for lack of prudence or diversification when offering these self-directed windows, the bill effectively transfers significant investment risk entirely onto the individual participant. The Labor Secretary is also explicitly prohibited from creating any future rules to limit or ban the types of investments available in these windows, removing a key federal safeguard.

This means that for the average employee who might not fully understand the risks of day-trading or investing in highly concentrated positions, the guardrails are coming off. While the plan manager gains freedom and reduced legal risk, the employees—especially those who rely on existing fiduciary oversight to protect their nest egg—bear the cost if those self-directed choices go south.