House Republicans have dealt a blow to a proposed rule that advocates say would help federal employees and retirees avoid costly investment mistakes.

The House Appropriations Committee Wednesday approved a bill denying the Labor Department funds to finalize, administer and enforce the rule. On the same day, Labor Secretary Tom Perez was testifying before another House committee in an effort to ease lawmakers’ concerns.

The rule would close loopholes in current law by putting financial advisers on the hook for advice they give clients on rollovers and Individual Retirement Accounts. It would require the advisers to adhere to a “best interest standard,” even when offering advice on a one-time basis.

Financial professionals now must comply with a lower “suitability” standard when discussing those options.

“That allows them to make recommendations that are, essentially, in their own best interests rather than their clients’,” said John Hatton, deputy legislative director of the  National Active and Retired Federal Employees Association. “It’s a pretty weak standard.”

NARFE has joined with a coalition of other groups, including the American Federation of Government Employees, to lobby Congress to support the Labor Department rule. The association also sent a letter to House members. It said the current standard left federal employees vulnerable to bad financial advice, particularly  when deciding what to do with their Thrift Savings Plan accounts upon leaving the government.

“Because rollovers are not covered by the current rule, financial advisors may legally recommend that TSP account holders roll over their TSP holdings into an IRA, where the money could be invested in a mutual fund providing the same, or essentially similar, product, such as an S&P 500 index fund, for as much as 50 times the cost,” NARFE said in the letter.

Financial planners who give that advice may be profiting from the higher fees or commissions of the new investment vehicles, Hatton said.

The TSP charges lower fees than most commercial investment options. But more than half of TSP participants withdraw their savings within a year of separating from the federal government. The Federal Retirement Thrift Investment Board, which administers the TSP, has made it a priority to keep retirees’ money in the TSP.

In a December 2013 survey, NARFE found that more than 75 percent of its members who took money out of the TSP regretted doing it.

Rule’s opponents say burden and cost to advisers

The rule faces powerful opposition from financial services firms, including Fidelity Investments. While Fidelity supports its purpose, the rule is unworkable in a practical sense, Executive Vice President Jack Harley told members of the House Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions.

Firms would have to ask potential clients to sign contracts before offering even the most general of financial advice, he said. Both Democrats and Republicans echoed those concerns in questions to Perez.

The Labor Secretary said the department welcomed all input and would continue to refine ways to “operationalize” the rule. It has extended the public comment period. It plans to hold a public hearing during the week of Aug. 10.

He drew a contrast to five years ago, when the department first attempted to write such a rule. This time, Perez said, the department had consulted extensively with all stakeholders, including  the financial-services industry, during the rulemaking process.

At heart, he said, the rule was simply meant to “trust and verify” that advisers put their clients’ best interests at heart. Investors waste $17 billion annually because of the sort of conflicted advice that the proposal would prevent, he said.

“Most people assume the same holds true with their financial professionals, but that’s not always the case,” he said. “They operate under no commitment to do what’s in the best interests of their client.”

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