Wall Street’s New Plan to Fill 401(k)s With Junk: 3 Big Changes That Could Hit Your Retirement Hard

Get ready. Your 401(k) could soon be full of junk stocks.

The folks who maintain the S&P 500 are considering some big changes that could allow huge, unprofitable companies to join the benchmark index. That could dramatically lower the quality of stocks your retirement funds are invested in.

Mega-cap companies like SpaceX, OpenAI, and Anthropic may soon go public at sky-high valuations. But current guidelines from the index committee at S&P Dow Jones Indices (S&P DJI) would disqualify them from inclusion in the S&P 500.

To address this, the committee put out a press release on April 30 announcing that they’re considering guideline changes for index eligibility – specifically for mega-caps. The company has opened a public consultation, inviting investors to comment on the proposed changes.

The three big changes they’re considering are waiving or changing the requirements for financial viability, liquidity, and IPO seasoning.

Below, I’ll explain each of these and how they could negatively affect your retirement portfolio.

1. Waiving Financial Viability: From Quality to Junk in One Easy Step

Financial viability really means profitability. And it’s unique among the large popular indexes like the Nasdaq Composite and the Russell 3000 indexes, which have no such requirement. Even at S&P, it only applies to real estate investment trusts and to the S&P Composite 1500 universe: the S&P 500, S&P MidCap 400, and S&P SmallCap 600.

Financial viability simply requires that by generally accepted accounting principles (“GAAP”), net income from continuing operations must be positive for the most recent quarter and for the sum of the recent four consecutive quarters.

That’s not terribly strict when you think about it. For example, a company could lose $10 million in each of three consecutive quarters, but as long as it makes more than $30 million in the fourth consecutive quarter, the sum of its last four quarters will be positive. That doesn’t often happen, but you can easily see that the sum of the last quarters can include one or more losing quarters and still be profitable when added together.

Still, having to produce a profit establishes a floor for quality.

Remember Tesla’s (TSLA) IPO? When it went public on June 29, 2010, its $2.2 billion market cap was nearly double the smallest stock in the S&P 500 at the time. But it wasn’t added to the index until December 2020. The reason was the viability requirement. It had to string together four quarters of profitability before it could be added.

S&P DJI is doing this now because of the mega-cap IPOs on tap for the coming year.

SpaceX bought AI developer xAI in February, with the combined company valued at $1.25 trillion. Musk will reportedly seek to raise $75 billion in an IPO that values the company at $1.75 trillion.

SpaceX isn’t a junk company. Its launch business is a true market dominator, accounting for 87% of U.S. space launches in 2024. Its Starlink satellite business posts positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and generates more than 60% of SpaceX’s revenue.

It’s good that SpaceX has achieved profitability by some measures. But EBITDA isn’t GAAP net income. As the late Charlie Munger said, whenever you hear “EBITDA,” think of it as “bullshit earnings.”

Why ‘Junkification’ of the S&P 500 Is Inevitable

In practice, S&P DJI’s committee has blocked companies from the index or delayed adding them, even though they technically met this test.

For example, Strategy (MSTR) consistently showed GAAP losses before a change in accounting rules allowed it to use gains in the value of its bitcoin to boost earnings.

The S&P DJI committee has not allowed it in the index. They don’t publicly state why, but the reason seems obvious: GAAP profits based on bitcoin’s value aren’t operating profits. Owning bitcoin is not a business. It’s a type of speculation.

AppLovin (APP) met all the criteria for the S&P 500 by June 2025 but wasn’t admitted until September 2025. The committee never said why.

I’m not bad-mouthing the committee, and you can see why. The world is practically forcing it to abandon or at least downplay the role of GAAP net income, because it has been changed over the years to include items unrelated to a company’s real business.

And companies like OpenAI and Anthropic are already playing games with their income reporting as private companies. They report income, with massive AI training expenses and without – as if AI software will never need training! AI software isn’t just written. It’s written, then trained. And it’s not just done once. It’s pre-trained and fine-tuned using human feedback. AI isn’t AI without training and training is very expensive. I wonder how they’ll try to manipulate public perceptions of their finances once they’re publicly traded?

All S&P DJI is doing now is proposing to formally waive a requirement that has, for some time now, been inadequate to describe an ideal index candidate.

The problem with that is when you waive the requirement for one reason, you waive it for every other reason. It doesn’t matter why the authorities are having trouble using GAAP net income as the financial viability requirement. It only matters that they’re considering removing it altogether for mega-cap stocks.

Once they do that, companies like OpenAI and Anthropic will be eligible. OpenAI is projecting $14 billion in losses for 2026 and $44 billion in total losses over the five-year period between 2023 and 2028. Anthropic lost an estimated $5.2 billion in 2025.

2. Waiving Liquidity: You’ll Be Cashing Out Billionaires

The second requirement S&P DJI is considering waiving is liquidity. The primary measurement here is the investable weight factor (“IWF”), which is the company’s public float as a percentage of its total outstanding shares. The current threshold is an IWF of 0.10, meaning that 10% of a company’s outstanding shares must actively trade every day.

So, if a company has a billion shares and 90% of them are held by the founder and other insiders, it is technically eligible for index inclusion. That’s not a big deal. It just means the company’s effective market cap for the index is one-tenth of the total market cap.

But a 10% float is really small, which makes you wonder why they’d remove such a low threshold. The answer is because SpaceX, OpenAI, Anthropic, and others can’t clear that hurdle. If SpaceX goes public at a $1.75 trillion valuation by selling just $75 billion of stock, that’s 4% of the total valuation.

All three companies have recently raised money. The folks who made those investments likely won’t want to sell for some time. Founder and other shares will also be locked up for 180 days after the IPO date. In other words, the only public float any of these companies will have is whatever new shares they sell into the open market.

Mega-caps don’t go public every day, but we have examples of recent mega-cap IPOs with floats below 10%. U.K.-based Arm Holdings (ARM) floated 9.4% of its shares in its September 2023 IPO. Instacart, trading as Maplebear (CART), sold less than 8% of its shares into public markets that same month.

However, this issue is bigger than it first appears.

Keeping the float small greatly benefits insiders, while 401(k) account holders lose out if these stocks are added to the index.

For example, let’s say OpenAI goes public at a $1 trillion market cap and a 5% float ($50 billion of tradable stock). On day one in the index, it’ll be weighted like a $50 billion company. No biggie.

But starting 180 days after the IPO, lockups will expire, and more stock will start to enter the market. That’ll push up its weighting in the index… which will force every S&P 500-indexed or -benchmarked fund on earth to buy more of the stock.

And as private investors exit over a period of years, you’ll own more of these companies – even if they keep losing money.

How the Safest Investments Become the Most Dangerous

Is this likely to break your 401(k) today?

No.

But one day, when you have 30% or 40% of every dollar you’ve invested for decades in a handful of companies and half of them aren’t even profitable, then you’ll get it. Savers and retirees will begin to wake up as they did in March 2008, when Bear Stearns’ subprime mortgage funds failed and took the 85-year-old company down with it.

The idea that U.S. 30-year mortgages could become toxic waste was on virtually no investor’s radar. People saw it as one of the safest assets on the planet. I bet the average 401(k) saver didn’t know a thing about the housing crisis until mid-September 2008, when Lehman Brothers failed and the Treasury Department forced the big banks to take bailouts. Folks who had recently retired are still living with the consequences today.

Wall Street will always tell you it’s doing a great job of helping diversify your assets and reduce your risk. It never, ever tells you what will happen if everything goes wrong.

But that’s how investments work: The ones everybody thinks are safest are always riskier than you’re led to believe. The more popular an investment becomes, the riskier it tends to be.

Nearly everyone thought U.S. housing was safe before the financial crisis. Bonds were considered safe in 2020, when the 10-year Treasury note was so expensive it yielded just 0.5%. Then Treasurys entered a three-year bear market.

In fact, it’s the widespread idea of safety that invites these disasters.

And today, few assets enjoy the popularity of the S&P 500. When folks started saying “there is no alternative” a few years ago, they meant that there is no alternative to owning U.S. stocks… and that means the S&P 500.

The belief that the S&P 500 is a safe, no-brainer investment at any price will come back to haunt millions one day. The junkification of the S&P 500 could start sooner than you think.

3. Reducing IPO Seasoning: Speeding Up the Timeline for Index Inclusion

That’s because the third guideline the committee may soon change is IPO seasoning. That’s the length of time after a company goes public before it is considered eligible for index inclusion.

Right now, that period is 12 months. That gives the stock time to prove itself in the marketplace. If the market hates a new IPO and crushes the share price, there’s not a lot anybody can do about it.

So why would they change the seasoning requirement?

Well, remember how the financial viability requirement kept Tesla out of the S&P 500 for 10 years, even though its market cap was large enough on the day it went public? That exclusion cost S&P 500 index fund investors about 0.24% per year over the course of that decade.

Some would argue that, as Tesla grew larger throughout that period, excluding it made the index less and less representative of the overall market.

That’s why the committee started allowing companies with dual-share classes in 2023 after excluding them in 2017. Those are companies with two classes of common shares with different voting rights. One class is for the public (with one or zero votes per share), and one class is for insiders (which often has 10 votes per share).

From 2017 to 2021, an index of dual-class shares rose 196%, compared with a 64% return for the S&P 500. The rule cost investors real money.

Bottom line: If the seasoning requirement is eased, some of the funds in your 401(k) could start automatically buying SpaceX, OpenAI, or Anthropic shares six months after they go public… and continue buying even more of them as their shares unlock and become part of the public float.

This has the potential to become a massive wealth-transfer scheme, passing shares from founders and insiders to retirees and savers. In industry parlance, you’ll become the “exit liquidity” – the bagholder that a mega-cap company can pawn their shares on when the founder wants to buy another yacht, jet, or mansion.

With a change in rules, you’re more likely to be invested in unprofitable companies with relatively small public floats… and much faster than before.

S&P DJI’s public consultation for adjusting its index inclusion guidelines ends on May 28. Sometime after that, they are likely to issue a statement of their intention to change the rules – or not.

If you have a 401(k), the potential junkification of your retirement savings just became the most important item on your investment calendar this year.

Good investing,

Dan Ferris

Editor’s Note: The highly respected forecaster who called the banking collapse in 2008 just released an urgent warning. He says life in America is about to take a very strange turn. It’s crucial you prepare today. See his urgent warning here.