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Security Act (ERISA) regulates 401(k)s. Passed a half-century ago, it imposes a mindset that’s both infantilizing and outdated, and in practice is designed less to empower workers than protect employers from lawsuits.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.

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