Suit Disputes Inclusion of Former Parent Company Stock in DC Plan

The Phillips 66 retirement plan committee has been sued for allowing ConocoPhillips stock funds to be included in the plan's investment lineup.

Participants in the Phillips 66 Savings Plan have filed a proposed class action lawsuit against the plan investment committee for continuing to offer company stock of the company’s former parent, ConocoPhillips, in the plan’s investment menu.

According to the complaint, the defendants maintained the ConocoPhillips Stock Fund and ConocoPhillips Leverage Stock Fund as plan investment options from May 1, 2012, to the present, causing approximately 25% of plan assets to be invested in that single security. Since Phillips 66 was spun off from the parent company, the lawsuit maintains that the ConocoPhillips stock funds are not “employer securities” as defined by the Employee Retirement Income Security Act (ERISA).

In addition, the complaint says the plan’s investment in ConocoPhillips stock violated ERISA’s diversification and prudence requirements and was “reckless under any common-sense investment strategy for several reasons.” Participants allege that an investment fund holding hundreds of millions of dollars in a single security is, by definition, undiversified, exposing investors to extreme volatility and risk. Second, they say ConocoPhillips stock has an extremely high correlation to Phillips 66 stock, the plan’s largest investment and the stock of the employer sponsoring the plan. “For this particular plan, this high correlation made ConocoPhillips even more risky, imprudent, and further removed from an efficient portfolio than would the presence of ConocoPhillips stock in the average plan. Together, these two highly correlated stocks represented over half of the plan’s assets—an imprudent and unnecessary undiversified risk for the workers and retirees who depend on the plan for their retirement savings,” the complaint says.

Participants also say the investment in the parent company stock funds was imprudent because ConocoPhillips is in the petroleum industry, a volatile, high-risk sector of the economy subject to boom-and-bust cycles.

According to the lawsuit, the plan’s overly concentrated position caused participants to lose millions of dollars as the price of ConocoPhillips stock fell dramatically. Participants claim the defendants also ignored the numerous warning signs that showed ConocoPhillips stock was an imprudent investment for retirement assets and then failed to take action as the price of ConocoPhillips stock dropped from $86.50 to its current price of approximately $50. “Defendants should have been particularly aware of these risks concerning ConocoPhillips stock because the plan invested over $1 billion, or approximately 25% of its assets, in the ConocoPhillips funds during the class period,” the lawsuit claims.

The lawsuit seeks restoration of plan losses resulting from the plan committee’s fiduciary breaches as well as equitable relief.