On Friday, May 22, 2020, a panel of three Fifth Circuit judges affirmed the dismissal of an ERISA lawsuit brought on behalf of participants in the Phillips 66 Savings Plan (the “Plan”). The complaint, filed in the US District Court for the Southern District of Texas, alleges that Phillips 66 breached its fiduciary duties to the Plan and its participants by failing to divest the two ConocoPhillips Stock Funds (the “CP Funds”) in the Plan, and claims that publicly available information suggested the ConocoPhillips stock represented a risky investment and Phillips 66’s failure to evaluate it as such breached its fiduciary duties of diversification and prudence. When ConocoPhillips Corporation spun off Phillips 66 in 2012, the retirement assets of those who became employees of Phillips 66, including assets invested in the CP Funds, were transferred from the ConocoPhillips Savings Plan to the newly created Plan. Following the separation, Plan participants could retain or sell their assets in the CP Funds but were prohibited from investing in them further. At the time of the spin-off, the Plan had approximately $1.1 billion in the CP Funds.
Plaintiffs allege that Phillips 66 should have reduced the Plan’s significant stake in the CP Funds to insulate the Plan from the risk of substantial losses due to overconcentration. The Fifth Circuit disagreed, pointing out that the fiduciary duty to diversify only requires defined contribution plan fiduciaries to “provide investment options that enable participants to create diversified portfolios,” not to guarantee the diversification of each participant’s individual portfolio. Moreover, the panel reference the Plan’s Summary Plan Description, which urges participants to consider diversifying their retirement accounts and alerts them to the level of risk inherent in single-stock funds, like the CP Funds. As further purchases of the CP Funds were prohibited, the Fifth Circuit added that participants could not add “more eggs to the basket” and were free to liquidate their CP Fund positions and reallocate those assets among the Plan’s other investment alternatives.
Plaintiffs also had a bi-part duty of prudence claim tossed. The panel concluded that the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer foreclosed the first prong, in which the complaint argues that Phillips 66 should have been aware, through an evaluation of publicly available information, that the market was underestimating the risk of ConocoPhillips stock. The panel shot this argument down, referring to the Dudenhoeffer holding 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.” The second tenet of Plaintiffs’ prudence claim relates to the contention that positions in a single-stock fund are per se imprudent due to its lack of diversification. While the Fifth Circuit allowed that Plaintiffs plausibly alleged that the CP Funds were imprudent by virtue of their substantial risk, it observed that nothing in ERISA obligated Phillips 66 to “act as personal investment advisers” and compel participants to divest.
The legal team at SFMS has substantial experience litigating ERISA matters. If you have any questions regarding this subject or this posting, please contact John Roberts (firstname.lastname@example.org) or Alec Berin (email@example.com). We can also be reached toll-free at (866) 540-5505.
Shepherd, Finkelman, Miller & Shah, LLP, is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania. SFMS is an active member of Integrated Advisory Group (www.iag.global), which provides our firm with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please call us at 866-540-5505 or contact us online.
Author: Jonathan Dilger