If I had to bet the reasons why would be that the 9x kernel was extremely frail and if you want to have any chance of Task Manager actually running it had to run from the start
I belive that's the way thing were done in those days. In Win95 the Start Menu was also in memory, with the entire menu tree, progam names, icons, and everything. It would open instantly. In Win98 they changed that. It would read the .lnk files form disk (or cache) every time it openend. But it added drag&drop editing! And IE integration. And Active Desktop. And web content in Explorer folders.
You probably remember the BSODs due to buggy drivers.
One could argue that an OS for PC (Win9x) doesn't need any isolation. There's only one user (personal in "PC").