Court Dismisses Lawsuit Over Inclusion of Former Parent Stock in Retirement Plan

A judge agreed that the plaintiffs failed to plead facts to state a claim for breach of the duty of prudence and the duty to diversify against the investment committee for the Phillips 66 Savings Plan.

A federal district court has dismissed a lawsuit against the Phillips 66 Savings Plan investment committee for continuing to offer company stock of the company’s former parent, ConocoPhillips, in the plan’s investment menu.

U.S. District Judge Sim Lake of the U.S. District Court for the Southern District of Texas disagreed with the committee’s argument that it is exempt from the Employee Retirement Income Security Act’s (ERISA)’ s diversification requirement because the ConocoPhillips shares retain their character as employer securities after the spinoff of Phillips 66 under ERISA Section 407(d)(1)8; however he agreed that the plaintiffs have failed to plead facts to state a claim for breach of the duty of prudence and the duty to diversify.

Among other arguments, the judge found the plaintiff’s citation of the Internal Revenue Service Private Letter Ruling 201427024 which supported the argument that because ConocoPhillips ceased to be the employer of the participants of the plan after the spinoff, its shares are not employer securities with respect to the plan, to be persuasive. “Having carefully considered the parties’ arguments and authorities the court concludes that shares of ConocoPhillips stock are not employer securities and that Defendants are therefore not exempt from ERISA’s diversification requirement with respect to the ConocoPhillips Funds,” Lake wrote in his opinion.

In support of the investment committee’s motion to dismiss the claim that it violated ERISA in failing to diversify investments, it argues that the plan offered a diverse menu of investment options in which participants could invest their assets; the extent of the plan’s holdings in ConocoPhillips was attributable to the participants’ elections to retain the ConocoPhillips stock; and section 404(c) of ERISA relieves plan fiduciaries of liability for losses that result from a participant’s exercise of control.

Lake quoted Young v. General Motors Investment Management Corp. in saying “because ERISA requires that fiduciaries diversify ‘the investments of the plan,’ the statute ‘contemplates a failure to diversify claim when a plan is undiversified as a whole.'” He noted that the participants in the Phillips 66 plan decide how to allocate their contributions among the plan’s investment options, and the plaintiffs do not challenge the diversity of the investment options. Lake found that because the investment committee did not mandate that participants’ assets remain in ConocoPhillips Funds and because the plaintiffs do not allege that the plan’s other investment options are not diversified, the plaintiffs fail to allege that the plan was not diversified on its face. “Plaintiffs have therefore failed to state a claim for relief based on a duty to diversify,” he wrote.

Lake also quoted Fifth Third v. Dudenhoeffer in which the Supreme Court held that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” He disagreed with the plaintiffs’ argument that Dudenhoeffer does not apply to the current case. “Plaintiffs have neither alleged in their Complaint nor argued in their Response that any ‘special circumstances’ are present. Because Plaintiffs have not identified any plausible special circumstances undermining the market price as a measure of ConocoPhillips’ value, Plaintiffs fail to state a claim for breach of the duty of prudence based on public information,” he wrote.

Citing court precedent, Lake said “[T]o plead plausibly a breach of the duty of prudence for failure to investigate, plaintiffs must allege facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.” He found that the plaintiffs’ complaint contains only legal conclusions with no specific factual allegations about the process the investment committee engaged in. In addition, Lake said the plaintiffs fail to allege that an adequate investigation would have revealed anything other than the publicly available information allegedly establishing that the ConocoPhillips Funds were a risky investment option. “Because Plaintiffs’ allegations restate their claim for breach of the duty of prudence based on public information, Dudenhoeffer forecloses their claim. Therefore, Plaintiffs fail to state a claim for failure to engage in an adequate process for evaluating the prudence of continuing to hold the ConocoPhillips Funds,” he wrote.