It’s Time To Unleash 401(k)s – OpEd

The 401(k) is one of the most consequential financial inventions of the last half-century. Accounting for $9.3 trillion in assets, 401(k)s direct the investment and retirement decisions of 70 million Americans. But they’re not as high-yielding as most plan owners might think.

When workers set one up through brokerages like Fidelity or Voya, they learn that their “choices” are limited to mutual funds, target-date funds, and perhaps a bond fund. No private investments, crypto, or leverage (other than the $50,000 max imposed by the IRS). 40% of 401(k)s offer a “self-directed brokerage window” allowing holders to buy individual stocks, but they’re tightly regulated: options trading, for instance, is not allowed. 

Such limits don’t come from brokerages or technological barriers. A federal law called the Employee Retirement Income Security Act (ERISA) regulates 401(k)s. Passed a half-century ago, it imposes a mindset that’s both infantilizing and outdated, and in practice is designed less to empower workers than protect employers from lawsuits. 

Under ERISA, employers and plan committees are legally responsible for both offering retirement plans and ensuring they meet a demanding “prudence” standard. The employers are liable if their plans don’t meet such standards, and courts can judge against them years later, with the benefit of hindsight.

In practice, this means that anything perceived as too volatile, complex, illiquid, or unconventional becomes a liability risk. Even perfectly mainstream investments—like actively-managed growth funds with slightly higher fees—have triggered massive lawsuits. For example in 2022, Northwestern University lost one brought by participants in its pension system. The charge was that among the many investment options offered, some funds were too risky and had too high of fees. Northwestern’s defense was that it aimed to offer variety, and that the choice of funds was ultimately up to each participant. That argument lost unanimously before the Supreme Court.

In 2024, reports PlanAdviser, ERISA-related lawsuits jumped 35%, “with even more ERISA class action cases filed with novel theories against both defined contribution and defined benefit plans.” To avoid such liability, employers restrict workers into conventionally “safe” funds, not necessarily those that provide the best return.

The rationale for ERISA regulations is very much out of the 1970s. Back then, average workers had less access to sound investment advice, while the stock brokerage and custodianship industry was more opaque. The law was designed to protect working- and middle-class investors from overzealous sponsors peddling unsound investments. After all, no company wants to see its long-time janitor gamble his life savings away.

But today’s investing landscape is much more transparent for the layman. Information about individual stock and asset performance is readily available for free from both internet and news media sources. Modern brokerages have seamless digital dashboards where people can easily login and scour company financials before executing trades. Many investment houses now offer “robo advisors” that charge little to no fees, and leverage AI to do fundamental analysis. Meanwhile human advisors have dropped their fees due to the competitive pressure.

Already, workers can invest their after-tax income however they want, whether in individual stocks or speculative assets, or nothing at all. The freedom to take risk to either reap a windfall or lose money is the core of a healthy market economy.

But many workers direct their income to 401(k)s also, since that earns an employer match. By forcing nearly all of those trillions into passive, conservative funds, ERISA distorts markets. High-scale indexes with blue chip stocks become overweighted; under-the-radar alternative investments that may be more deserving of capital go ignored. 

Much like the mandates that drive employer-provided health insurance, ERISA puts the onus on employers to provide for employee welfare while facing liability if something goes wrong. It’s a paternalistic mindset that limits retirement savings, encourages frivolous lawsuits, and feeds lawyers more than it actually protects anyone.

Proposals to make 401(k)s more flexible have been modest, and fall along partisan lines. The Biden administration issued language discouraging pension funds from rolling out private equity as an option, citing its high fees and illiquidity. But President Trump in 2025 signed an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” It directs regulators to explore the feasibility of letting 401(k) holders purchase assets ranging from crypto to real estate. Of course, allowing a certain asset class in 401(k)s doesn’t prevent it from still being the basis for lawsuits under ERISA’s current regulatory environment.

The best answer is to weaken ERISA so that employees take ownership of their investments. They should be able to choose between conservative funds and those with a high-risk/high-return composition, just as they already do in self-directed IRAs and taxable accounts. And they should also have to live with the consequences of their choices, rather than being able to sue their employers after something goes wrong. 

Ultimately, the question of expanding 401(k) options comes down to whether regulators believe adults should be able to make decisions about their own financial futures—even if some of them make bad choices. 

• This article was published by the Independent Institute