The Diffusion of Innovation Curve and Guaranteed Lifetime Income: Understanding Adoption Patterns

Recent data from the National Association of Plan Advisors (NAPA)’s annual “Summit Insider” survey provides valuable insights. The survey asked advisors about their own interest as well as their plan sponsor clients’ interest in in-plan guaranteed lifetime income products, revealing a trend that might look familiar to some.

Source: 2024 NAPA 401(k) Summit Insider Survey, National Association of Plan Advisors, May 2024

The results are very similar to the Diffusion of Innovation curve developed by communication scholar Everett Rogers. Rogers’ theory outlines how an innovation is adopted by a population. In this case, the “innovation” is integrating annuity products within a defined contribution plan to provide participants with a guaranteed stream of lifetime income. While the survey focused on interest rather than actual adoption, the results are rather intriguing.

The survey results largely align with Rogers’ categories. Those with high interest fall into the “Innovators” category (typically the first 2.5% to embrace new ideas). Frequent interest aligns with “Early Adopters” (the next 13.5%). Occasional interest reflects the “Early Majority” (the next 34%). Those with minimal interest align with the “Late Majority” category (the next 34%), and those with non-existent interest fall into the “Laggards” category (the last 16% to adopt an innovation).

Source: 2024 NAPA 401(k) Summit Insider Survey, National Association of Plan Advisors, May 2024

As visualized, the advisor interest curve (dark blue line) is slightly ahead of the traditional Diffusion of Innovation curve (gray line), but follows a similar pattern with a small but growing group paving the way, while the majority shows occasional (“Early Majority”) or minimal (“Late Majority”) levels of interest.

Among financial advisors, 12% expressed high interest in in-plan guaranteed lifetime income products (“Innovators”) and 19% indicated frequent interest (“Early Adopters”).  This subset of early movers represents those who are actively learning about in-plan annuities and starting to recommend them to their clients. They may also be leveraging their knowledge of these solutions to win new business.

Plan sponsor interest (light pink line) appears to lag slightly behind the diffusion curve. The survey reveals that 42% of advisors indicated that their plan sponsor clients have minimal interest (“Late Majority”), and 21% reported non-existent interest (“Laggards”).¹ However, a not-insignificant portion of plan sponsors are interested, according to their advisors, with 10% having indicated high or frequent interest and 27% having expressed occasional interest.¹

Most “Occasional” plan sponsor interest was up-market, with two-thirds of respondents whose target market includes plans with $100 million to $250 million in assets indicating occasional sponsor interest.¹ Further, 0% of those whose target market includes plans with $250 million to $500 million in assets indicated non-existent plan sponsor interest with most representing at least minimal interest.¹ This is not unlike other diffusions we’ve seen in the past, such as auto-enroll and auto-escalation, with the smaller end of the market following the larger end.

Overall, plan sponsors are increasingly aware of the benefits, but rely on their advisors to help them make informed decisions. As we see advisors and consultants embrace these solutions, plan sponsors will likely follow.

This diffusion pattern of in-plan annuities presents an exciting opportunity. Now, how can we influence this trend? Rogers lays out five key elements in his Diffusion of Innovation theory. I’ve listed these below, along with how these may play out in the context of guaranteed lifetime income:

• Innovation: In-plan annuities are a groundbreaking solution to retirement security that is now available within DC plans. They provide a guaranteed income stream, a feature that was once exclusive to defined benefit (DB) pensions. This innovation addresses the growing concern of outliving retirement savings due to increased life expectancy. Some variants of these products offer additional protection against risks such as equity returns, market shocks, and inflation. What's more, some of these solutions are flexible and can adapt to various plan, participant, and advisor needs and circumstances.

• Adopters: Financial advisors who are at the forefront of adoption can play a key role as influencers. By actively researching and recommending in-plan annuities, they can help pave the way for broader acceptance by being persistent advocates not only with their clients, but also with the recordkeepers where certain products are made available.

• Communication Channels: Industry publications, conferences, and educational resources targeted at financial advisors and plan sponsors are crucial communication channels. These channels help spread awareness about the benefits and features of in-plan annuities. The topic has dominated large industry events for the past few years, and we expect this trend to continue as more plans put these solutions into practice.

• Time: Widespread adoption takes time. While many regulatory and technological hurdles have been overcome, financial advisors still need time to become comfortable with the product, and plan sponsors need to be convinced of its value for their employees. As awareness grows and successful implementation stories emerge, we expect the pace of adoption to accelerate.

• Social Systems: The financial services industry functions as a social system. Positive experiences shared by early adopters, both advisors and plan sponsors, will influence the behavior of others within the system. Industry associations and regulatory bodies also play a role by advocating for the benefits of in-plan annuities. Government has already shown broad bipartisan support with the passage of the SECURE Act of 2019, which provided a Safe Harbor for plan sponsors for the selection of an insurer.

While applying the Diffusion of Innovation theory to survey results on interest in guaranteed lifetime income solutions is not an exact science, there are valuable insights that can help us understand how advisor and plan sponsor interest is evolving.

To accelerate the adoption of in-plan annuities, it's important to understand the diffusion process, anticipate challenges, and leverage opportunities. Effective communication through the right channels and addressing concerns of advisors and plan sponsors is key to promoting widespread adoption and ensuring guaranteed lifetime income is readily available within DC plans. This will help lead to a more secure retirement for more plan participants.

In essence, in-plan annuities are more than just a financial product; they represent a potential paradigm shift in how Americans achieve financial security in their golden years. By understanding the diffusion process and actively working within its framework, we can help this innovation reach its full potential.

Allianz Life Insurance Company of North America is committed to supporting advisors who want to stay ahead in the guaranteed lifetime income market. We have compiled several resources to help you expand your income knowledge. One of our latest offerings is our new white paper, Risks Reframed, which explores the changing landscape of retirement risks and how guaranteed lifetime income products can mitigate them.

Additionally, we have created a practical tool to help you apply the concepts from the white paper. Our Risks Reframed: Field Guide (PDF) is an interactive worksheet that helps facilitate discussion between advisors and their plan sponsor clients on the various retirement risks that their participants may face and strategies for addressing them. To explore our complete library of insights, blogs, and practice management tools, visit www.allianzlife.com/dcplanresearch.