In Schweitzer v. Investment Committee of the Phillips 66 Savings Plan, the U.S. District Court for the Southern District of Texas held that an employee retirement fund established by a newly spun-off entity did not violate its fiduciary duties to its participants by continuing to hold a major portion of its assets in company stock from the old parent company.

When ConocoPhillips (Conoco) spun off its wholly owned subsidiary, Phillips 66 Company (Phillips), in 2012, its employees' retirement funds were transferred from the plan managed by Conoco to a plan managed by Phillips. Before the spin-off, many Conoco employees held Conoco stock as part of their retirement savings. When Conoco employees left for Phillips after the spin-off, the Phillips retirement plan retained the Conoco stock its members held, which comprised roughly 25% of the new plan's assets. After Conoco stock began to perform badly, a group of employees filed a class action against the administrators of the Phillips plan for violating the duties of diversification and prudence.

The central issue was whether the administrators could defend their holdings of Conoco stock under ERISA, which allows a plan administrator to ignore the duty to diversify when purchasing securities from the plan participants' employer. The defendants also claimed the plaintiff class had not pled any facts establishing a violation of the duty to diversify and the duty of prudence.

The Court held that the Conoco stock was not employer stock that is protected by ERISA, despite having been employer stock when it was initially acquired. However, the Court also held that the defendants had not violated their duty to diversify because they had offered all participants the option to move their savings out of the Conoco stock they had previously purchased, and had not purchased any additional Conoco stock after the spin-off. Nor had the defendants violated their duty of prudence by failing to force the participants to divest their oversized holdings of Conoco stock because there were neither "special circumstances" dictating a divestiture of Conoco stock nor an inadequate investigation into the long-term prospects of Conoco stock.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.