When visiting a financial adviser for consultation about retirement savings one might assume those counselors have their best interests in mind. Unfortunately, that’s not always the case. To better ensure consultants are working for consumers and not for fees, the Labor Department will propose new rules to increase standards for brokers who recommend investments for retirement accounts.

The Washington Post reports that the proposed rules, which will be submitted for approval from the Office of Management and Budget, aim to crack down on the fees charged by brokers and financial advisors who consult consumers regarding retirement savings.

Under the rules, brokers would be required to justify if they are recommending a security that is more expensive than other options available or that may be underperforming.

Currently, rules don’t place emphasis on cost or performance. Instead, they only require that an investment be “suitable.”

The Post reports the changes target Individual Retirement Accounts, which are used by more than 40 million consumers and currently hold more than $7 trillion in savings.

According to research released by the White House Council of Economic Advisers, current weak consumer protections cost IRA investors up to $17 billion a year in excessive fees.

“When you have a broker who has their compensation directly tied to the advice they’re giving to a person, they’re going to systematically have a big incentive to steer clients to investments that aren’t necessarily in their best interest,” Jason Furman, chairman of the Council of Economic Advisers tells the Post.

The new rules are not expected to eliminate commission payments.

Additionally, the Council reports that nearly $1.7 trillion in IRA assets are invested in products that provide payments to advisors and can lead to three types of conflicts of interest.

The Post reports the first conflict occurs when investors are encouraged to roll over assets from a 401(k) plan into an IRA without warning that the fees may be higher than their previous investments.

Another conflict occurs when brokers recommend that investors buy and sell a fund or security more often that is needed, leading consumers to pay fees repeatedly.

The final conflict involves advisers attempts to justify their fees by recommending that clients use actively managed funds. However, when those funds underperform, investors are stuck with higher investment costs.

The Council of Economic Advisers estimates that such conflicts reduce consumer saving by more than a quarter over 35 years. For example, if consumers put away a $10,000 investment that would normally grow to more than $38,000 over 35 years, conflicts would result in the investment being worth only $27,500.

David Certner, legislative policy director at AARP, tells the Post that more often than not consumers are unaware of the conflicting interests or their likelihood of leading to smaller savings.

“Most of the general public has no idea that there are different kinds of advisers or different kinds of standards,” he says. “Most of them assume that the advisers are working in their best interest.”

Consumer advocates were quick to applaud the new proposed rules.

Our colleagues at Consumers Union say the new rules would help protect millions of Americans from predatory sales tactics.

“These reforms are critically important to consumers who are dealing with the enormous complexity of retirement savings,” Pamela Banks, senior policy council for CU says in a statement [PDF]. “The last thing you want is for your nest egg is to be eaten away by unnecessary fees and bad investments. These rules haven’t been updated in 40 years. We welcome this proposal to update the rules to make sure the investors’ interests are the top priority.”

Investors will have a chance to submit comments in writing and in a public hearing. After a review, the Administration will determine what to include in a final rule.

Obama calls for higher standards on brokers giving retirement advice [The Washington Post]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.