The recent surge in 401(k) balances may not be as reassuring as it seems. Much of the growth over the past two years has been driven by a handful of artificial intelligence (AI) stocks, raising concerns that millions of Americans may be taking on more investment risk than they realize.
AI-related stocks now account for roughly 45% of the S&P 500’s total market value, a record high for a single group of companies, according to S&P Dow Jones Indices data cited by The Kobeissi Letter.
This means investors who believe they are spreading their money across 500 companies may actually have a large portion of their retirement savings tied to a relatively small number of AI businesses.
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The concentration could grow even further. Bank of America strategist Michael Hartnett estimates that AI-related companies could account for 48% of the US stock market, up from about 40% currently, if SpaceX, OpenAI and Anthropic go public, Bloomberg reported.
For Americans approaching retirement, reducing that exposure may come with its own financial consequences. Morningstar has warned that selling investments in taxable accounts to rebalance a portfolio can trigger capital gains taxes and potentially increase Medicare premiums.
AI stocks account for nearly half the S&P 500’s value
Bank of America data showed that AI’s dominance within the S&P 500 has only one historical parallel: the railroad era of the 1880s, when those companies controlled about 63% of total U.S. market capitalization, Benzinga reported.
AI-linked stocks have driven 67% of the index’s price returns since January 2024, contributing 22 percentage points to the S&P 500’s 33% total gain, while the remaining 458 companies added just 11 points, The Kobeissi Letter reported on X.
Dan Lefkovitz, a Strategist at Morningstar Indexes, said that the concentration poses a meaningful risk even for investors who remain optimistic about AI’s long-term potential, according to an AP News report.
<strong>Investors don’t have to think there’s an AI bubble to be concerned about the concentration risk that AI has wrought. Concentration … leaves investors holding a market portfolio less diversified than in the past, by stock, sector, and theme,</strong>
The gap became more apparent in 2026. The S&P 500 gained about 10% since late February, while a Goldman Sachs index that excludes AI enablers showed that the broader market had barely moved, Yahoo Finance confirmed.
Many 401(k) investors may have more AI exposure than they realize
The concentration in AI stocks also affects retirement accounts because of the way index and target-date funds are structured.
The 10 largest 401(k) mutual funds now have an average allocation of 38% to technology and communications services, Morningstar data compiled by Forbes found. Communications services include major companies such as Alphabet, Microsoft, and Meta, adding to investors’ exposure to businesses closely tied to AI development.
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Meanwhile, 76% of all plan assets across Vanguard-administered accounts were invested in equities at the end of 2025. Target-date funds now make up 45% of plan assets in Vanguard’s system, channeling contributions into cap-weighted indexes where AI names dominate, Vanguard’s “How America Saves 2026” report confirmed.
About 30% of people with a 401(k) or individual retirement account (IRA) say they never rebalance their plan, GOBankingRates found. This can allow investments that have grown faster than others to take up an increasingly large share of a retirement portfolio.
As a result, millions of retirement savers may be exposed to greater technology-sector volatility than they intended, particularly if AI stocks experience a significant downturn.
AI-driven stock concentration is quietly shaping retirement portfolios, leaving millions of 401(k) investors exposed to technology sector volatility and market shifts.Abdullah Durmaz / Getty Images
Rebalancing retirement investments could increase Medicare costs
Christine Benz, Director of Personal Finance and Retirement Planning at Morningstar, recommended that investors focus rebalancing activity inside their tax-sheltered accounts.
Selling appreciated investments and moving the proceeds into other funds within a 401(k) or IRA generally does not trigger an immediate capital gains tax.
For example, investors could reduce their holdings in an overweight S&P 500 index fund and move the proceeds into bond funds, international equities or small-cap value funds available in their retirement plans.
The situation is different in a taxable brokerage account. Selling appreciated investments can generate capital gains that increase a household’s modified adjusted gross income (MAGI). Higher income could push investors above the thresholds for Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), resulting in higher Part B and Part D premiums.
For 2026, the first IRMAA tier begins at $109,000 for single filers and $218,000 for married couples filing jointly, and the surcharge uses a two-year lookback to determine premiums, the Centers for Medicare and Medicaid Services (CMS) confirmed.
Part B surcharges range from $81.20 to $487.00 per month, Part D adds $14.50 to $91.00, and the combined annual cost for a married couple at higher tiers can exceed $10,000 above standard premiums.
How investors nearing retirement can reduce their AI exposure
Lefkovitz recommended that investors consider allocating more of their portfolios to US value stocks, smaller companies, or international equities, all of which have less AI exposure and trade at discounts to Morningstar’s fair value estimates.
The U.S. accounts for about 25% of the global economy but 63% of global stock market value, which means non-U.S. markets offer structural diversification away from the AI theme, Lefkovitz noted.
The largest cloud computing companies are projected to spend an estimated $670 billion on capital expenditures in 2026, according to Goldman Sachs Research, and any slowdown in that spending would, by default, hit stock index fund holders.
For retirees already withdrawing money from their portfolios, a market downturn can create another challenge. Selling investments to cover living expenses while account balances are falling can lock in losses and leave less money available to benefit from a market recovery. This is known as sequence-of-returns risk.
Benz has advised that savers over 50 focus on building a portion of their portfolio in safer, lower-volatility assets as a buffer against the kind of concentrated downturn that AI exposure now represents, the Associated Press reported.
The 401(k) allows participants to make that shift without generating a taxable event or an IRMAA bill, according to Morningstar.
For the roughly one-third of retirement account holders who say they never rebalance, reviewing their allocations and making adjustments within tax-sheltered accounts could be an important step toward managing concentration risk, Benz has said.
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