Your 401(k) is funding the AI boom. Here’s what that means for your retirement

“They didn’t choose to buy these stocks, and they don’t really know what’s going on,” said Hera Hyeonseo Lee, a doctoral researcher at Binghamton University.

About 54% of U.S. households have a 401(k), according to the Federal Reserve, and the overwhelming majority of these retirement plans default into cap-weighted index funds that buy all the stocks in the market and buy more of the biggest companies. “So whenever a company like Nvidia grows and takes up more of the S&P 500, the fund automatically buys more of it,” Lee says. That happens no matter how expensive or big the company gets, and it has long made good sense.

“Market cap weighting isn’t a choice, it’s not a methodology, it just is,” said Jim Rowley, global head of indexing strategy and solutions at Vanguard. “Investors collectively have decided that one stock should be this large, or another stock should be this small.” Anyone who owns one stock or weighs a stock differently than the market consensus is actively investing, he says.

As large companies get larger than ever, norms are shifting, making things riskier for 401(k) holders who thought they were playing it safe. SpaceX went public in June and became one of the first takers for the Nasdaq’s new “fast-entry” rule. The rule change allowed SpaceX, which passed a $2 trillion valuation on its first day of trading, to join the Nasdaq 100 in a fleeting 15 days. It’s a marked shift from the traditional three-month waiting period; historically a guardrail for both retail investors and the market itself, the seasoning period was meant to allow the newly public company to establish trading history and limit disruption in major indexes.

Fast-entry rules may make an index more current, but they also incentivize major private companies to choose one exchange over another. Rules like this, almost certainly, will come into play as AI leaders Anthropic and OpenAI careen toward trillion-dollar-plus IPOs.

Key figures

• 80%+: Share of 401(k)s that default into target-date index funds, which are mostly cap-weighted.
• 30%: The Magnificent Seven’s share of S&P 500 market capitalization.
• 54%: Share of U.S. households with a 401(k).

Sources: Federal Reserve, National Association of Plan Advisors, Yardeni Research.

The size of these companies has been a seismic change, as has the market’s relentless concentration around tech. “Information technology and communication services are two of the 11 sectors of the S&P 500, and they account for 45% of the market cap of the S&P 500,” said Ed Yardeni, president of Yardeni Research. “The Magnificent Seven accounts for something like 30% of the market cap of the S&P 500. It’s a concentrated market, there’s no doubt about it. And those stocks are going to be increasingly volatile because they’re increasingly controversial.”

Concentration is only half the story. “It’s concentration and size, all packed together, even more than there was during the dotcom bubble,” said Valentin Haddad, associate professor of finance at UCLA Anderson. “There’s a possible technological shock that’s built into the whole economy that could take down a big portion of the market.”

The 401(k) savers, who played by the rules, nevertheless are in the AI-bubble blast radius.

AI is making the biggest companies in the world even bigger—or at least, it appears that way. The image is part truth, part illusion, and part gamble. Tech’s marquee names, from Microsoft to Meta, have funneled billions into their own AI bets and invested heavily in private companies they work with. The AI era has seen no shortage of creative accounting across startups, but unconventional accounting treatment has also snuck into Magnificent Seven earnings.

Consider Amazon, said Lee. It has invested $13 billion in Anthropic, and that investment—which has grown in the private markets—actually shows up in Amazon’s net income. How is that possible? It goes back to a 2016 accounting rule change called “mark-to-market” that allows companies with private market investments to count valuation bumps—in short, unrealized gains—as real income.

“In the first quarter of this year, Amazon’s net income was almost $30 billion,” Lee points out. “But almost $17 billion came from its Anthropic mark-to-market gain.”

So, as Anthropic has risen from a new unicorn in 2023, when Amazon first invested, to its $965 billion valuation as of mid-September, it can look like Amazon is raking in real cash to those who aren’t reading the fine print.

“That high valuation in the private markets is unrealized,” said Lee. “People don’t realize that some of these numbers, sometimes actually half of them, are from paper gains.”

It isn’t all about private market valuations either. Lee notes that Microsoft, for example, has taken steps to lessen its near-term accounting obligations by extending depreciation schedules. Data center equipment and facilities look like they’re lasting longer—and perhaps that’s true—but Microsoft is also spreading out the costs over a lengthier period of time, even if what it’s ultimately spending remains high.

The accounting minutiae for any one company doesn’t matter to the average 401(k) holder, nor should it. But here’s what does matter: Fuzzy math is interspersed throughout the AI boom. In an environment where some figures are real and others are a mirage, it’s hard to know how bad the damage will be unless the bubble finally bursts.

There’s an irony at the center of this: The workers most likely to have a 401(k) are those in white-collar jobs whose livelihoods are potentially threatened by AI.

“I really worry that workers—average workers, including me—are so vulnerable,” said Lee. “I worry that workers are using their deferred wages to finance the AI designed to eliminate their jobs.”

There are layered financial and sociological changes currently unfurling. For one, as the AI bubble makes 401(k)s vulnerable, particularly for those nearing retirement, AI is simultaneously altering how people engage with their funds. The technology is changing how savers get their information, moving from paper statements “to really quick, digestible bites,” said Heather Balley, AllianceBernstein managing director of defined contribution.

Additionally, passive investing—like index funds and target-date funds in 401(k)s and ETFs—has grown since the dotcom bubble burst in 2000. Through a historic bull market, passive investing has long been a slam dunk, even as underlying changes sow uncertainty about the future.

“People believe this system will help them, but in the end, it’s not always happening that way,” said Lee. “Their contributions are automatically defaulted into Big Tech capex, and that capital finances the AI automation that eliminates their jobs. They’re paying to build this technology, and it can make their skills obsolete.”

So what happens if the bubble pops? Well, if you look at your 401(k), you’ll see it. Take, for example, Tesla, said UCLA’s Haddad.

“If you think about Tesla, it’s not that hard to imagine a scenario where Tesla completely goes bust,” said Haddad. “I’m not saying it’s going to happen, but that’s a possibility. And Tesla can even be something like 3% to 4% of some portfolios, in their 401(k). So, whether they know it or not, Tesla is a big chunk of lots of people’s portfolios, and if it all goes away in one go, that’s a big drop.”

The combination of market concentration and the sheer size of the companies in question means we could see a crash that could take the shape of the dotcom bubble burst.

“It’s going to be quick and painful in some ways,” said Haddad. “The most natural analogy is the internet bust in 2001. Imagine all valuations dropping like crazy—down 30% or 40% over a few months. And if you look in your 401(k)—Fidelity, whatever—you’ll see a number that’s a little bit more than half of what you had before, and you’ll get very worried.”

To be clear, this frightening scenario more or less aligns with most downturns over history: They inflict a sharp but finite period of pain.

“On average, [market corrections] last about a year,” said Yardeni. “So you might have to grin and bear it for a year. The bottom line on 401(k)s is nothing happens to your money until you take it out.”

If savers—especially those close to retirement—are concerned, they should reassess their risk tolerance, keep their costs low, and adjust as needed, says Vanguard’s Rowley.

“In investing, there are so many things that aren’t in our control,” he says. “I can’t control if the market goes up or down. I can’t tell the future. But I can control figuring out my time horizon, risk tolerance, and asset allocation. I can choose between stocks and bonds, and can pick funds on the lower end of the cost spectrum. Those are things in my control. That’s very important wisdom for investors of all kinds.”

There are other options to explore, too. For example, equal-weight index funds—every company gets the exact same percentage share—are having their moment and are offered as an option in many 401(k) plans.

And if you’re interested in becoming an active investor: “There’s an investment philosophy right now that says, ‘Buy the whole market except for the Magnificent Seven,’” noted Haddad. “I think there’s a broad sense that that’s not crazy in this environment. But the average 401(k) investor has no clue.”

On some level, that hands-off trust is perhaps what tech titans are betting on.

On The Weekly Show With Jon Stewart in July, author Cory Doctorow cited the succinct investing instructions Warren Buffett says he gave his wife in the event of his death: “Just put it in an index fund and forget it.” That seemingly sound advice from the master of the field now risks backfiring, Doctorow argued. “Well, if you did that, Elon Musk just unloaded on you,” he said.

This article appears in the October/November 2026 issue of  Fortune with the headline “Your 401(k) is bankrolling the AI bubble.”

This story was originally featured on Fortune.com