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The psychology of retirement saving

If it would surprise you to learn that the choice between eating a banana or chocolate in a lab experiment has helped to redefine the way Americans save, then you're behind on the latest thinking in "behavioral finance"—the study of how human psychology impacts investing and markets—and that could cost you on the road to a comfortable retirement.

To pioneers in the 401(k) test lab, like Shlomo Benartzi, UCLA professor and chief behavioral economist at Allianz Global Investors, the effort to outsmart our shortsighted, animal side—the one that tends to make irrational financial decisions, especially when it comes to retirement investing—has gotten off to a good start, but it remains a largely unfinished project.

The leading edge of experimentation with retirement messaging will have critical implications for savers over the next two decades, especially among less-affluent Americans.

Felipe Rodriguez Fernandez | Photographer's Choice | Getty Images

"The needle is moving in the right direction," Benartzi said. "We've been following measures adopted in the market, and there is good news, but we're also concerned that there is bad news."

Arguably, the single biggest change made to 401(k) plans based on behavioral finance is auto enrollment—the feature that forces employees to "opt out" of a plan or automatically be enrolled in it when they join a company.

You don't need to be familiar with the scientific literature on what is known as "choice architecture" to understand why it's been a big boost to 401(k) plans—it gets around the passive nature of most individuals when it comes to putting off "tomorrow's decisions" today. The results speak for themselves: 60 percent of large employer 401(k) plans now feature auto enrollment.

Benartzi isn't celebrating, though—rather, he sees a wall ahead.

"Behind the scenes, people are very concerned about reaching the point where 60 percent of [large] 401(k) plans have auto enroll," he said. "It seems like that's roughly where we'll end up. I don't think it will go much higher."

(Read more: Less choice is more when it comes to retirement plans)

Benartzi and other investment psychology tinkerers are in the lab looking for other ways around the retirement challenge, and that can help savers stay ahead of the curve. Here is what they see on the 401(k) frontier, broken down into five key concepts:

(Two academic-sounding terms are at the top of the UCLA professor's list: "digital exclusion" and "information architecture." Never fear: It's not as complicated as it sounds when translated into plain English.)

1. If you think you will sign up for a retirement plan online, think again.
Americans live in a world of screens now—and so do retirement-plan sponsors—but for all the ways digital access is making chores easier, it isn't tempting the 40 percent of Americans lacking auto enrollment to participate at a higher rate in 401(k)s. In fact, it's a hindrance, Benartzi said.

Recent statistics shared with Benartzi by a 401(k) plan advisor showed that almost 100 percent of employees sign plan paperwork when it is done at a retirement seminar, but that figure drops to 35 percent when the employees are sent home with the paperwork and have to mail it back in. More eye-opening, when employees are sent home and encouraged to go to a website to join, only 5 percent sign up.

"We might have hit a problem with digital exclusion," Benartzi said. "People have iPhones and Internet access but when they get home have other things to do on the computer. And lots of these websites are not easy to navigate." He added that in "the next five years, we won't see much more improvement in people signing up for a plan unless we figure out new digital approaches. We will see very little participation of new employees."

(Read more: New ways to get workers hooked on a 401(k))

Benartzi said that while white-collar Google workers can navigate a website even if it is overloaded with information, digital exclusion is a problem that is particularly acute among smaller-plan, blue-collar worker–oriented companies in Middle America.

"We have a critical generation in time now, and we can't say the difference between people with or without retirement plans is just the ability to fight through unfriendly websites," he said.

2. Americans still don't have a clue how painful it is to cash out of a 401(k).
In 2012, 39.4 percent of all American workers participated in an employment-based retirement plan, compared with 39.7 percent in 2011. It may not be a big dip, but participation did head in the wrong direction year over year, and that has people like Benartzi worried.

Nevin Adams, director of education for the Employee Benefit Research Institute, said that it's likely the primary "culprit" in the recent slight dip in participation is more a function of people's employment status (unemployed, underemployed, part-time).

"Auto enrollment won't do anything if you're not eligible for the plan," he said.

Auto enrollment also won't do you any good if you cash out of a plan when leaving an employer.

In a world of part-time jobs and switching jobs, workers end up with lots of opportunities over a career to cash out, and many of those individuals are ones struggling to make it in the current economy. For those who might be tempted to cash out, Benartzi said confusion over the implications of that decision is still a huge problem.

"People do not understand the tax hit and how much future return it is taking away from them, and they don't know how much it hurts, especially if they cash out each time they change jobs," Benartzi said. He knows this for a fact: He sat in on a customer-service phone line at a plan administrator, listening to people call in to cash out accounts. "It's an eye-opener. You see how little they understand and how poor a job we do as an industry to help out."

(Read more: Making sure your nest egg doesn't crack)

EBRI data projects that if this "leakage" in retirement assets was reduced by half, it would equal another trillion dollars put into retirement savings over the next decade. "This is a blind spot we need to address," Benartzi said.

One emerging technology that gives him some confidence: more use of personalized videos, so when people try to cash out accounts, they can see on a video screen their name and account balance and what they are about to lose in value. He pointed to Idomoo's pension fund statement video as an example of what could be done.

The messaging can be structured to make sure individuals understand a few key points:
—The IRS will be owed X amount of money, and you won't get it back.
—Every time you switch jobs, you will have less at retirement, if not nothing at all.
—If you really are desperate, you don't have to cash out the entire plan balance.

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