Federal regulators on Tuesday proposed rules, more than four years in the making, to provide greater consumer protection for retirement savings, requiring a broader group of investment professionals to act in their customers’ best interests when handling their retirement money.

The financial services industry can be a minefield for ordinary investors, who often cannot tell whether their advisers are putting the investors’ interests first; the legal term for this is fiduciary duty. The rules, proposed by the Labor Department, which oversees retirement accounts, are part of the Obama administration’s declared mission to support the middle class.

The proposed rules would eliminate some of the loopholes that allow brokers to avoid acting as fiduciaries when providing advice on retirement money held inside accounts like 401(k)’s and in individual retirement accounts, which hold roughly $7 trillion, as estimated by the Federal Reserve.

The effort is expected to save investors $40 billion over 10 years, and that estimate takes into account only some of the conflicts that plague the financial services industry, according to the regulators.

“We want to make sure people get put into products that work best for them,” Thomas E. Perez, the secretary of labor, said in a conference call with reporters. “We have met way too many people who have worked their tails off for retirement, they had barely enough saved to begin with, and then they were steered into a product that was unduly complex.”

The new rules would update the Employee Retirement Income Security Act, or Erisa, which was enacted in 1974. Then, many retirees relied on pensions and did not have to worry about managing retirement savings. But now, as people are living longer and relying on money from self-directed retirement plans, investors are on their own.

Investors are particularly vulnerable when they roll over the savings they have accumulated in 401(k)-type retirement accounts, which are overseen by their employers, into individual retirement accounts. Brokers who are advising customers on that transaction do not necessarily have to act in the customer’s best interests and may be influenced by higher commissions or other incentives the firm has put in place.

As a result, investors’ money may not end up in the most appropriate investment, potentially costing them thousands of dollars over many decades. In 2012 alone, rollovers to I.R.A.s exceeded $300 billion, and that is expected to rise steadily in the years ahead.

Erisa requires investment professionals to act as fiduciaries when providing advice, but “advice” is defined narrowly. The proposal would expand that fiduciary requirement to include any professional receiving compensation for providing individualized advice, advice to an employer with a retirement plan, workers taking part in those plans and I.R.A. account holders.

“Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure the customer is adequately protected,” regulators said in a statement.

The way some brokers are paid can be riddled with conflicts, and the brokerage industry groups had worried that the rules would upend the way they do business. Brokers will still be allowed to charge commissions and engage in practices known as revenue sharing, in which, for example, a mutual fund company shares a portion of its revenue with the brokerage firm selling the fund; companies that pay more might get a spot on the firm’s list of recommended funds.

While brokers can still get paid in those ways under the new rules, they will be required to enter a contract with customers stating they are putting the investors’ interests first — and disclose any conflicts that may prevent them from doing so. With a contract in hand, dissatisfied investors should have greater recourse. They would most likely still resolve a dispute through arbitration, since nearly all investment firms require investors to agree to settle their disputes that way.

“It is designed to give investors greater ability to use the contract requirement to hold financial professionals accountable,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

Now that the rule has been announced, regulators will collect comments from the public — industry groups, consumer advocates and other stakeholders — for 75 days. After reviewing the comments, the administration will decide what to include in the final rule.

The Labor Department’s effort has faced strong opposition from the financial services industry, which has argued that the rules would make it too costly to work with smaller investors, or would force brokers to put them into more expensive accounts that charge a percentage of their assets.

Though the Labor Department has been working on the rule for several years — it rescinded its first proposal in 2011 after criticism that it was too aggressive — the effort received broader attention in February, when the Obama administration publicly stated it supported the measure.

Drawing on academic research, the White House has estimated that the lack of investor protection annually costs investors $17 billion, or 1 percent of their assets, and perhaps more.

Today, only registered investment advisers are legally required to adhere to the fiduciary standard. If this rule is enacted in the current form, that would be expanded to cover brokers who make recommendations on retirement money. Now they only need to recommend “suitable” investments based on a consumer’s personal situation, taking into account factors like their age, goals and tolerance for risk. That sounds appropriate, but it provides enough leeway for brokers to put customers in investments that generate more profits for the brokers (or their firms) at the customers’ expense.

The Labor Department’s proposal is limited in scope because it applies only to retirement money. Dodd-Frank, the financial regulatory law that went into effect in 2010, gave the Securities and Exchange Commission power to propose a rule that would universally require brokers to act as fiduciaries, even if they are helping with money that is not retirement-related.

The S.E.C. chairwoman, Mary Jo White, recently said she believed her agency should enact a uniform fiduciary duty for broker-dealers and investment advisers. But it is still unclear if she could win the support of at least two members of the five-member commission — two Republican commissioners have questioned whether it is necessary — and complete the typically long and laborious rule-making process during her tenure.

Source: The New York Times