Labor Secretary Thomas Perez headed to Capitol Hill this week to defend the department's controversial fiduciary proposal, telling skeptical lawmakers that the new rules are needed to protect retirees from conflicted investment advice.

Too often, Perez argues, advisors and brokers put their interests ahead of their clients, and are even encouraged to do so under the current standard that they recommend products that are merely suitable for their clients. The Department's proposed rule would affect advisors or brokers receiving compensation for providing investment advice to a retirement plan sponsor, plan participant or IRA owner.

"The challenge is that the system is flawed," he told members of a House subcommittee. "They are operating within a structurally flawed system, a market that sees the personal financial interest of the advisor and the firm all too frequently misaligned with the best interest of the customer."

Perez acknowledges that most advisors want to do right by their clients, but when working with retirement plans or investors who are looking to roll over a 401(k) they might find an array of products that could be deemed suitable for the client. It's only natural, then, that they would recommend the product that meets that threshold while also providing the advisor with the highest compensation.

"People are rational -- they respond to the incentives that are there," Perez says.

Several lawmakers and a panel of witnesses weren't buying it.

Rep. David Roe (R-Tenn.), chairman of the Education and the Workforce Committee's Subcommittee on Health, Employment, Labor and Pensions, spoke for many Republicans on the panel when he blasted the DoL proposal for threatening to leave millions of Americans and small businesses without retirement advice.

The concern that Roe and others outlined is that many brokers who work on commission will be unable to operate under the new regulations, and will simply abandon the retirement space altogether.

"If this rule goes into effect, a lot of people will quickly learn that their financial advisor -- someone they have known and trusted for years -- will no longer be able take their call," Roe says. "And it's important to note that low- and middle-income families are the ones who will bear the brunt of this misguided proposal. They will lose access to their personal service that they've relied on and will be forced to find ... advice online or simply fend for themselves."

The Labor Department has been under fire since it first issued its fiduciary proposal in 2010. It ultimately withdrew that framework and set to work on a redraft, while lawmakers of both parties and industry groups continued to warn against any rules that could undermine access to retirement advice.

Earlier this year, President Obama spoke out in support of the rules and Democratic opposition seems to have cooled. The Labor Department unveiled its latest proposal in April, initiating a comment period that it has since extended to run for 90 days. The department is also planning a public hearing on the issue in August, and Perez maintains that he is open to suggestions to improve the rule and make it easier for industry to "operationalize."

The Labor Department's guiding rationale for its rule -- that retirement advice is crucial at a time when 10,000 Americans a day are reaching age 65 and the erosion of defined-benefit plans has left more investors responsible for financing their golden years -- is not under contention. But while Perez insists that consumers of modest means are most at risk from conflicted advice, and therefore the ones who stand to benefit from the fiduciary rule, critics counter that this segment of investors is largely served by brokers whose commission-based fee structure would be imperiled by the new regulation.

Following Perez's testimony, a panel of witnesses appeared before the subcommittee, all but one in opposition to the Labor Department's proposal.

Kent Mason, a partner at the law firm Davis & Harman who has been lobbying against the rules, called for legislation that would enshrine the fiduciary standard while establishing workable carve-outs that would preserve the commission model.

"The industry is absolutely fine with a best-interest standard, and has been for the past four-and-a-half years," Mason says. "The concern has always been related to the prohibited transaction rules, that make certain business models effectively illegal, such as the brokerage model."

Perez, who appeared as the lone witness in the first session of the hearing and did not have a chance to counter the charges of the witness panel, insisted that the rules carry no prohibition against any common business model, and leave room for brokers to continue to serve the retirement market, so long as they provide advice that's in the best interest of their clients.

"The rule doesn't ban commissions," Perez says flatly.

The Labor Secretary also touts the proposal’s disclosure requirements, suggesting that readily available information about fees and compensation will enable consumers to compare brokers and advisors.

"One of our goals is transparency," Perez says. "Right now the system is very opaque. You don't know what the precise fees are."

But that transparency won't do much good for consumers if their advisors flee the market. Jack Haley, executive vice president of Fidelity Investments, warns that provisions of the DoL proposal like the best-interest contract exemption, which would mandate that advisors operating under the fiduciary standard sign a contract with their clients, would be unworkable for the firm.

Fidelity, a leading provider of retirement plans for small businesses, contends that if it were brought under the fiduciary provisions of the Employee Retirement Income Security Act, it would be compelled to cut off service to that segment.

"Unfortunately, the DoL proposal would specifically prohibit service providers from assisting small businesses," Haley says. "The result would have a devastating impact on retirement coverage and savings for millions of workers employed by small businesses across the country."

Some investor advocates see those objections as a smoke screen.

Dennis Kelleher, president and CEO of Better Markets, calls the industry's complaints "a false choice," charging that firms are simply disinclined to change the way they do business.

"The real choice is this: let the DoL act to protect the hundred million workers and retirees across this country, or continue letting brokers and other advisors put their interests ahead of their clients," Kelleher says. " If some brokers don't want to do that or feel that they can't make enough money doing that, then there are plenty of retirement investment advisors who are more than willing to put the client's interests first."

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