Retirement expert issues stark warning on AI and 401(k)s

For years, technology stocks became a permanent fixture within their portfolios for millions of retirement savers.

Workers who steadily added money to 401(k)s, IRAs, and target-date funds made huge strides, thanks to major stock indexes that became increasingly dominated by a small number of powerful tech stocks.

From 2009 through 2025, the Nasdaq-100 delivered roughly 17% annualized returns, while the tech-heavy S&P 500 posted about 11% annualized gains during the same period. For a lot of Americans, those returns became a part of their long-term retirement planning.

Then artificial intelligence made everything better.

Investors poured money into Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META) and other big-time tech companies that normally dominate such portfolios.

The investment in these portfolios is based on the belief that huge AI spending will unlock new growth, CNBC reported. The market mostly thought that AI would make software companies’ products more valuable, necessary, and profitable, which helped them, too.

It’s getting harder to defend optimism now.

At the same time, Wall Street is looking more closely at the huge amounts of money that need to be spent on AI to stay competitive and whether those investments will really make the money that the market has already priced in.

That matters, even outside Silicon Valley.

Many who are saving for retirement now have a lot of money in the same tech-heavy funds and indexes whose prices are changing. That might be a hard but manageable swing for younger workers, but a much bigger problem for people who are close to retirement.

Tech stocks became a retirement default

Technology did not become a retirement mainstay overnight. It became one over time, thanks to years of outperforming.

A lot of people who saved didn’t mean to put too much money in technology. They only owned broad market funds, large-cap growth funds, or target-date funds that became more focused on the sector as the market’s winners grew. What began as passive diversity gradually evolved into a subtle reliance on a select few corporations.

The concentration is really high.

Forbes says Morningstar data show that the 10 biggest actively managed mutual funds included in 401(k) plans have an average of 38% of their portfolios in technology and communication services. Some of the same businesses that investors think of as Big Tech, including Alphabet, Microsoft, and Meta, are in the second group. The “Magnificent 7,” including Apple (AAPL), Microsoft, Alphabet, Amazon (AMZN), Meta, Nvidia (NVDA), and Tesla (TSLA), now make up about a third of the S&P 500.

That setup worked great, as long as leadership maintained focus and momentum was strong.

However, it made retirement accounts more vulnerable to a sudden change when the market’s view of AI, software profits, and megacap spending changed.

Although it felt like diversification at first glance, such thinking was an incorrect assumption. It masks a major issue, since performance was not dependent on a broad base. Instead, the focus was on a small cluster of companies continuing to dominate.

Bill Bengen, the retired adviser whose research helped popularize the 4% rule, is already leaning more defensively, CNBC noted. He cut his equity exposure from 65% to 32% during the last few years and eliminated tech stock exposure completely. As he put it, it is “too difficult to determine how it’ll shake out.”

That remains the heart of the issue.

This is not just about whether tech stocks are performing badly. It is about whether millions of savers, many who did not want to take a chance on Big Tech, now need to anxiously depend on the outcome of the AI trade.

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For most of the last two years, artificial intelligence made the bullish case stronger. Investors saw AI as a good thing for both software businesses and the biggest cloud and semiconductor companies, thinking that the technology will make moats stronger instead of weaker. The end consequence was a market that continued giving the same winners more money.

But long streaks of wins might disguise risk.

When one industry is in charge for years, investors often forget how much of their future depends on it.

In this scenario, it’s not just the fact that technology stocks might go down that worries people. It is that millions of people saving for retirement may be more vulnerable to a change in the AI narrative than they ever planned to be.

Photo by Jose Luis Raota on Getty Images

AI is changing the software trade

The biggest shift is now focused on software.

During the height of the AI boom, the market thought that better tools would increase software companies’ worth. Some investors are starting to worry that the opposite might be true for some parts of the sector. Certain companies may lose some of the edge that once made their stocks worth more if AI coding tools can help make competing products faster and cheaper.

That price change is already happening.

The iShares Expanded Tech-Software Sector ETF(IGV), which is broadly tracking software stocks, is down 25% this year, according to the Forbes report.

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The Magnificent 7 have also fallen about 11% on average year to date, as the broader market puts a damper on things and investors reassess how durable the AI trade really is.

There is another point of pressure. To stay ahead in AI, the biggest tech companies are spending huge amounts of money on chips, servers, and data centers. At first, the market liked that spending. Investors now want clearer proof that the money will make money over time instead of just keeping the company competitive at a higher cost.

That doesn’t mean every AI investment will fail or every software company is broken. It does, however, mean that the market is getting pickier.

Companies that have strong ecosystems, pricing power, and real demand may still do well. People who have weaker products or positions that are harder to defend could have a much harder time than they did during the first part of the AI rally.

That’s why the story is so important for regular investors. Wall Street no longer thinks that AI is always good for every business in the chain. It is starting to separate the likely winners from the likely losers, and that kind of price change doesn’t usually stay in one part of the market.

A market that spent years rewarding AI optimism must now face up to anxiety. That is a very different exercise, and it raises the odds of more volatility for the same names that became the gold standard for retirement accounts for quite some time.

Bill Bengen’s warning matters most for near-retirees

The folks most at risk are often not the youngest investors who still have decades to save.

People who are close to retirement or who are already moving money out of their portfolios are more worried. When the market goes down early in retirement, taking money out can lock in losses and leave less money to invest when the market goes back up.

That is what sequence-of-returns risk is all about. It gets worse when a portfolio is strongly attached to one leadership group that suddenly loses momentum.

That’s why this story is more important than a normal drop in growth stocks.

If AI is affecting how investors value software firms and the biggest names in IT, it won’t just affect hedge funds and traders. It will show up in the account balances of regular savers who felt they owned a broad, diversified retirement portfolio.

Key takeaways for retirement saversMany 401(k)s and retirement funds now heavily involve technology after several years of excellent performance.Artificial intelligence is forcing stockholders to revamp and rethink software valuations and competitive benefits.Big Tech spending on AI infrastructure is facing much tougher scrutiny from the market.People who are close to retiring are at even more risk because taking money out during downturns can permanently lower future gains.Diversification matters more when one sector has dominated returns for as long as technology has.

None of it means that investors should sell their tech stocks right away.

Some advisers nevertheless say that the recent drop is a good thing and a chance to invest for the long run. Some people think rebalancing is the better option, especially for individuals close to retirement who can’t afford to wait for a protracted recovery.

It’s easier to learn from the market argument than from the practical lesson: Know what you possess.

A lot of portfolios that seem to be diverse on the surface are nonetheless very dependent on software valuations, mega-cap spending, and the future of the AI buildout. It was easy to forget about that need while the exchange was still going on.

Once investors start to wonder whether AI will make Big Tech even more powerful or hurt the portions of the model that made those businesses so valuable in the first place, it becomes much harder to ignore.

For years, tech stocks helped people save money for retirement. Investors thought that foundation was strong, but artificial intelligence is now challenging that idea.

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