Is stock in a former parent company entitled to the considerations afforded employer stock in the defined contribution plan of a spinoff?
The plaintiffs in a recent class action lawsuit argue that it is not. Their suit alleges that the investment committee of a company’s DC plan breached its duties of prudence and diversification under ERISA for continuing to invest plan assets in the stock of the parent company following the spinoff of the subsidiary that was part of the parent company.
In Schweitzer v. Inv. Cmte. of the Phillips 66 Savings Plan (No S.D. Tex., No. 4:17-cv-03013), participants in the Phillips 66 Savings Plan contend that the plan’s investment committee and the plan’s financial administrator breached their fiduciary duties by failing to actively monitor and remove imprudent investments in the plan by continuing to invest plan assets in the single stock of ConocoPhillips.
Filed in the U.S. District Court for the Southern District of Texas, the case stems from a spun-off company’s DC plan (Phillips 66) continuing to offer as an investment option stock funds from the original parent company (ConocoPhillips). Following a spinoff in 2012, Phillips 66’s DC plan continued to offer the ConocoPhillips Stock Fund and the ConocoPhillips Leveraged Stock Fund (together, the “ConocoPhillips funds”), which invested exclusively in ConocoPhillips stock. The funds appear to hold assets associated with an employee stock ownership plan (ESOP) and leveraged ESOP plan, respectively.
Noting that the plan held investments of nearly $1 billion (approximately 25% of its assets) in the ConocoPhillips funds, the plaintiffs contend that the plan’s overly concentrated position caused them to lose millions of dollars as the price of ConocoPhillips stock fell during the class period. They argue that the defendants did not follow an appropriate process or perform an independent review in evaluating the prudence of the ConocoPhillips funds. They also focus on the ConocoPhillips holdings not as an investment in employer stock, but see it as a single stock investment by the plan. In fact, they state that, “At no time was ConocoPhillips stock a ‘qualifying employer security’” with regard to this plan. The plaintiffs argue that the defendants did not independently assess whether to keep the ConocoPhillips funds as investment options because they “incorrectly believed” that ConocoPhillips stock was a “qualifying employer security” for the plan under ERISA § 404(a)(2), and thus the investments are not exempt from ERISA’s diversification requirements.
Citing Tibble v. Edison International, the plaintiffs note that, in addition to the duty to prudently select investments, a fiduciary has “a continuing duty of some kind to monitor investments and remove imprudent ones” and “a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.”
Noting that the 401(k) plan’s holding in ConocoPhillips stock was greater than its investments in all of the plan’s mutual fund investment options combined at the end of 2013, the plaintiffs argue that, “This heavy, overly concentrated position should have been a red flag to the defendants that they needed to diversify the plan’s assets in order to avoid the risk of large losses and ensure the plan’s assets were invested prudently.”
The plaintiffs also contend that the defendants should have seen numerous other red flags and warning signs indicating that the plan should no longer invest in ConocoPhillips stock. They note that the price of ConocoPhillips stock dropped in 2014 as the price of oil began to decline steadily and that market news in the fall of 2014 suggested that energy prices would remain low in the future.
The plaintiffs are asking, among other things, that the defendants restore all losses to the plan, including alleged loss of vested benefits, all profits defendants made through use of the plan’s assets, and all profits which the plan and participants would have made if defendants had fulfilled their fiduciary obligations.
This case will be interesting to watch as it moves forward. The case was filed on Oct. 9, and the defendants have yet to respond to the allegations. In light of the Tibble case, they will need to demonstrate that they had a process in place to monitor the investment lineup of the plan.
What will likely drive the decision here is the court’s determination of the status of the former parent company stock in the plan, apparently transferred to the Phillips 66 plan(s) at the point of the spinoff. If it is determined to be employer securities, then the guidelines in Fifth Third Bancorp v. Dudenhoeffer will likely be applied. If so, it bears noting that similarly situated plaintiffs have not had great success thus far. On the other hand, if the ConocoPhillips stock is not viewed as employer stock – well, that would be an entirely different matter.