"Open" will set that folder as your working space. The path of the selected folder will show up at the top of the window. The folder tree from that folder onwards will be displayed in Fred. Clicking on any folder in the path at the top will set the selected folder as working space.
Setting a folder as your workspace allows you to work continuously in the selected folder without having to click through the tree structure. Closing the Fred folder or the Fred application, will not change the work space folder.