In the 401(k) plan, "these new shares were immediately transferred to a new Phillips 66 Stock Fund and a new Phillips 66 Leveraged Stock Fund," said the complaint filed in a U.S. District Court in Oklahoma City on Jan. 18.
"Defendants should have been particularly vigilant in monitoring the Phillips 66 funds because they are single-stock funds comprised entirely of Phillips 66 stock, which is a risky and volatile investment subject to large price swings, and because they represented such a substantial percentage of the plan's overall assets," said the complaint in the case of Quigley et al. vs. ConocoPhillips Co. et al.
Although ERISA exempts company stock from its rules on plan diversification, the exemption doesn't apply for stock in another company — even a company that was a spin-off.
The Phillips 66 stock began trading on April 30, 2012. "The track record established between April 30, 2012, and December 31, 2016, was sufficient for a prudent fiduciary to recognize that (the) Phillips 66 Stock was more volatile than diversified investments; and this higher risk did not come with an expectation of higher reward," said the lawsuit, which is seeking class action status.
"As a result, a prudent fiduciary would have realized before December 31, 2016, and during the entirety of the class period, that prudence and diversification required divestiture of the Phillips 66 Stock funds in the ConocoPhillips plan," said the lawsuit, defining the class period as running from Jan. 18, 2017, to the date judgment.
"The Phillips 66 funds remained an investment option for the plan's participants because (the) defendants did not follow an appropriate process in evaluating the prudence of the funds," the lawsuit said. "Defendants did not perform an independent review, as they were required to do."
The lawsuit acknowledged that participants couldn't purchase more Phillips 66 stock and couldn't exchange other plan assets for Phillips 66 stock. Still, the defendants "had a fiduciary duty to remove the funds as plan investment options and sell all plan assets held in those funds," the lawsuit said.
At the end of 2021, Phillips 66 stock still represented about 5% of total plan assets, down from 13% at the beginning of the class period, the lawsuit said.
Also, at the end of 2021, ConocoPhillips stock represented 18.2% of total plan assets. Because ConocoPhillips and Phillips 66 are energy companies, the lawsuit argued that the 401(k) isn't sufficiently diversified.
Dennis Nuss, a company spokesman, wrote in an email that ConocoPhillips doesn't comment on active litigation.
The ConocoPhillps Savings Plan, Houston, Texas, had assets of $6.85 billion as of Dec. 31, 2021, according to the latest Form 5500.
