Issue: Winter 2021

Single Stock Fund Litigation: A Growing Circuit Court Split

By: Maureen J. Gorman, Stephanie B. Vasconcellos, and Richard E. Nowak, Mayer Brown LLP

Over the span of three months in 2020, two different Courts of Appeal (the Fourth and Fifth Circuits) addressed the fiduciary implications under ERISA of maintaining a single stock fund in a retirement plan investment lineup. The Fourth Circuit’s split decision in Quatrone v. Gannett Co., Inc., together with the Fifth Circuit’s decision in Schweitzer v. Investment Committee of Phillips 66 Savings Plan, highlight the dilemma for retirement plan sponsors and fiduciaries, who, as a result of a corporate transaction, inherit a plan investment fund consisting of a single class of stock that does not constitute an employer security for purposes of ERISA (i.e., a “single stock fund”). Plan fiduciaries in these circumstances have been the target of class action lawsuits alleging that they breached their fiduciary duties both by liquidating a single stock fund too soon and for not liquidating a single stock fund soon enough. While the federal courts are still evaluating how to handle these single stock fund cases, a plan fiduciary’s potential exposure for continuing to offer a single stock fund in a retirement plan appears to turn, at least in part, on the manner in which ERISA’s duties of prudence and diversification apply to the single stock fund as a plan investment option.


By way of background, a single stock fund within a retirement plan can arise in a number of ways, but often results from a corporate spin-off transaction. For example, in the spin-off of a corporate division, the parent corporation will contribute the assets and liabilities of the division to a new subsidiary corporation, and then distribute shares in the subsidiary to the parent corporation’s shareholders. If the parent corporation’s shareholders include a retirement plan with an employer stock fund that holds shares of the parent corporation, the retirement plan—like all other parent shareholders—will receive shares of the subsidiary corporation in connection with the spin-off. As a result, the plan will hold both the parent corporation’s stock and the subsidiary corporation’s stock. 

In this developing area of the law, courts have held that, where the retirement plan is maintained by the subsidiary corporation, the parent corporation’s stock will no longer constitute an employer security for purposes of ERISA § 407 (29 U.S.C. § 1107) if the parent corporation and subsidiary corporation are no longer deemed to be ERISA affiliates. By the same token, if the post spin-off retirement plan is maintained by the parent corporation, the subsidiary corporation’s stock will not constitute an employer security. This is important because ERISA § 404(a)(2) (29 U.S.C. § 1104(a)(2)) provides that acquiring or holding a qualifying employer security in an individual account plan does not violate a fiduciary’s duties of diversification or prudence (insofar as the latter requires diversification). If the parent corporation’s or subsidiary corporation’s stock no longer constitutes an employer security as a result of the spin-off transaction, the ERISA § 404(a)(2) safe harbor will no longer apply.

Quatrone v. Gannett

The Fourth Circuit’s decision in Gannett is worth reviewing in depth for the court’s analysis of what an ERISA plaintiff must assert to state a breach of fiduciary duty claim in a single stock fund case (and thereby survive a motion to dismiss), as well as its discussion of how ERISA’s fiduciary duties of prudence and diversification apply to a single stock fund. Essentially, the Court holds that ERISA’s diversification requirement applies at both the fund level and the plan level—a seemingly impossible burden for a single stock fund and certain other types of investments.

The general details of the Gannett transaction are typical of many corporate spin-offs. In June 2015, Gannett Co. Inc., a publicly-traded company, changed its name to TEGNA, Inc. (“Old Gannett” or “TEGNA”) and spun-off its publishing business into a new, publicly-traded, independent company, Gannett Co., Inc. (“New Gannett”). Old Gannett had sponsored a participant-directed 401(k) plan. Although the Old Gannett 401(k) plan provided participants with an array of investment options, the employer’s matching contributions were made in employer stock (i.e., Old Gannett stock). As part of the corporate spin-off transaction, the 401(k) plan was transferred to New Gannett. The 401(k) plan also was amended to freeze the TEGNA Stock Fund (i.e., the “Old Gannett” Stock Fund) to new investments, meaning that participants could only transfer assets out of, and could not increase their investment in, that employer stock fund. At the time of the transaction, Old Gannett and New Gannett also entered into an Employee Matters Agreement, which provided that all outstanding investments in the TEGNA Stock Fund were to be liquidated and reinvested in other investment funds on future dates established by the 401(k) plan administrator. The New Gannett plan document also provided that the Employee Matters Agreement could be used as an aid for interpreting the 401(k) plan.

In their complaint, the participant plaintiffs alleged that, at the time of the spin-off, 21.7% of the New Gannett 401(k) plan’s assets were invested in the TEGNA (Old Gannett) stock fund. During the second half of 2015, those Old Gannett shares fell in value by 19.3%, and in 2016, the shares decreased in value by another 16%. In June 2017, the New Gannett 401(k) plan administrator (the “Committee”) decided to liquidate the TEGNA Stock Fund over a period of 12 months, beginning in July 2017. At the time the plaintiffs filed their lawsuit in August 2018, however, the TEGNA Stock Fund had not yet been fully liquidated. 

The plaintiffs alleged in their lawsuit that the named defendants (New Gannett and the Committee) had breached their fiduciary duties of prudence and diversification under ERISA by their lack of action with respect to the TEGNA Stock Fund following the spin-off transaction. Specifically, the plaintiffs alleged that the Committee breached its fiduciary duty of prudence by failing to investigate and monitor the TEGNA Stock Fund, as demonstrated by its failure to (i) follow the terms of the Employee Matters Agreement and (ii) take any action in response to its auditors’ warnings about the 401(k) plan’s “concentration” risks. The plaintiffs also alleged that it was imprudent to maintain the TEGNA Stock Fund as a plan investment based on its non-diversification, a problem magnified by the fact that the 401(k) plan also had a single-stock fund devoted to the New Gannett stock, which was closely correlated to the TEGNA Stock Fund. The defendants moved to dismiss the complaint, arguing that the plaintiffs failed to plausibly allege a fiduciary breach under ERISA.

District Court’s Decision:  The district court in Gannett granted the defendants’ motion to dismiss for two primary reasons: (i) the plaintiffs’ duty of prudence claims were barred under the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer because plaintiffs failed to allege the requisite “special circumstances” related to mistakes in market valuation, and (ii) ERISA’s duty to diversify merely requires diversity among the funds offered by a retirement plan; it does not require that every individual fund be diversified. The district court also denied plaintiffs’ motion for leave to amend their complaint on the ground that it would be futile to do so in light of the court’s motion to dismiss ruling.

Fourth Circuit’s Decision:  A split Fourth Circuit panel vacated and remanded the district court’s decision to dismiss the complaint. In its analysis, the court began with the proposition that, to state a claim for breach of fiduciary duty, “a plaintiff must plausibly allege that a fiduciary breached [a duty], causing a loss to the employee benefit plan. The court explained that the duty of prudence under ERISA § 404(a)(1)(B) includes the sub-duties of investigation, monitoring/removal, and diversification; in addition, the court noted that ERISA separately specifies a duty of diversification under ERISA § 404(a)(1)(C).  Although ERISA explicitly excludes qualifying employer securities from its diversification requirements, the court assumed (based on the Fifth Circuit’s Schweitzer decision and defendants’ failure to assert otherwise) that post-spin-off, the TEGNA Stock Fund (i.e., Old Gannett stock) no longer constituted a qualifying employer security with respect to the New Gannett plan, and thus was not exempt from ERISA’s diversification requirements. Based on this finding:

  • The court rejected the defendants’ argument that a plan fiduciary is not obligated to ensure individual funds within a defined contribution plan are diversified so long as the plan’s investment menu allows participants to choose from a mix of investment options that enable them to create a diversified portfolio. Relying on its prior decision in DiFelice v. U.S. Airways, Inc., the court explained that each fund offered by a defined contribution plan must be prudent and, because diversification is a sub-duty of the duty of prudence, the duty to diversify applies at both the fund level and the plan level (i.e., to each individual investment offering).
  • The court also rejected the defendants’ argument that, because the TEGNA Stock Fund (Old Gannett stock) was frozen to new investments, and participants were able to withdraw their money from the fund, defendants were under no obligation to affirmatively remove the fund from the 401(k) plan’s investment lineup. The court held that there was no per se rule under ERISA that a fiduciary is never required to remove a frozen investment fund and that prudence may compel the removal of such a fund.
  • The court further held that it was not appropriate on a motion to dismiss to entertain the defendants’ asserted defense that participants could have divested the TEGNA Stock Fund at their discretion, because the defendants’ argument that the doctrine of participant choice relieved a fiduciary of liability was an affirmative defense that could not appropriately be decided on the pleadings.
  • The court held that Dudenhoeffer was inapposite, reasoning that Dudenhoeffer only foreclosed claims that a fiduciary should be able to predict the performance of publicly-traded stock absent pleading special circumstances. In this case, the court held that the plaintiffs’ claims of imprudence were based on the defendants’ failure to diversify, not on a failure to outsmart an efficient market.

Judge Niemeyer issued a spirited dissent, explaining that he would have affirmed the district court’s “well-reasoned” decision to dismiss the complaint. He explained:

I agree with the district court’s irresistible reasoning, which the majority opinion simply sidesteps with a myopic analysis. Specifically, the majority merges the duties of diversification and prudence and then erroneously focuses on a single investment option on the Plan’s diversified menu in concluding that the complaint adequately alleged breach of these duties. It also fails to account for the fact that the participants were given free rein to diversify their individual accounts. The result of the majority’s approach is a mechanically derived holding that is divorced from common sense and that will unnecessarily restrict the options offered in defined contribution plans.

Following the Fourth Circuit panel’s decision, defendants petitioned the entire Fourth Circuit for rehearing en banc, which was denied on September 22, 2020. On October 30, 2020, defendants filed a petition for writ of certiorari with the U.S. Supreme Court (Case No. 20-609), explaining that the panel’s decision was incorrect and conflicts with the Fifth Circuit’s decision in Schweitzer v. Investment Committee of Phillips 66 Savings Plan (discussed below).

Schweitzer v. Investment Committee of Phillips 66 Savings Plan

The Fifth Circuit’s decision in Schweitzer is particularly noteworthy because the underlying facts and issues are very similar to Gannett, but Fifth and Fourth Circuit panels reached very different conclusions. In 2012, ConocoPhillips spun-off Phillips 66 into a freestanding publicly-traded corporation. Prior to the spin-off, the Phillips 66 retirement plan held two single-stock funds comprised of ConocoPhillips stock. Those single-stock funds continued to be maintained by the Phillips 66 retirement plan after the spin-off, but the funds were frozen to new investments.

During the first two years following the spin-off, the price of the ConocoPhillips stock increased, but thereafter fell from $86 to $50 per share (a 42% decrease) over an approximately three year period. As in Gannett, a group of plaintiff participants filed a class action against Phillips 66 and its retirement plan investment committee alleging they breached their fiduciary duties of prudence and diversification under ERISA by retaining the ConocoPhillips stock funds in the Phillips 66 retirement plan. The district court granted the defendants’ motion to dismiss, holding that the plaintiffs failed to state a claim based on ERISA’s duty to diversify because the ConocoPhillips stock funds were frozen to new investments and the plaintiffs could divest from those funds at any time. The district court also held that the plaintiffs’ duty of prudence claim was foreclosed by Dudenhoeffer.

On appeal, the Fifth Circuit rejected the defendants’ argument that the ConocoPhillips stock continued to be a qualifying employer security after the spin-off (which would have exempted the ConocoPhillips stock from the duty of diversification). The court nonetheless concluded, however, that the plaintiffs had failed to state a claim and affirmed the district court’s dismissal of the complaint. 

  • With respect to ERISA’s duty of diversification, the court explained that this duty applies differently to defined benefit and defined contribution plans. In the case of a defined benefit plan, plan fiduciaries must ensure that the assets of the plan as a whole are diversified. In contrast, the court explained that the fiduciaries of a participant-directed defined contribution plan, like the Phillips 66 retirement plan, “need only provide investment options that enable participants to diversify their portfolios; they need not ensure that participants actually diversify their portfolios.
  • With regard to ERISA’s duty of prudence, the court held that, to the extent the plaintiffs were alleging the defendant fiduciaries should have known that the market underestimated the risks of holding ConocoPhillips stock, their claim was foreclosed by Dudenhoeffer. The court explained, however, that Dudenhoeffer did not foreclose the argument that it was imprudent for a defined contribution plan to offer a single-stock fund on the ground that such an undiversified fund is inherently risky. The court agreed that, in some circumstances, it might be imprudent to offer such a fund to participants as an investment option.
  • Ultimately, the court ruled that, because the ConocoPhillips stock funds were frozen to new investments following the spinoff, “the fiduciaries were not offering participants an imprudent investment option. The court also held that, because the participants were able to divest their investments in the single-stock funds at any time and the plan affirmatively distributed warnings about diversification, the plaintiffs failed to plausibly allege that the defendants should have forced divestment.

Given the similar factual circumstances, the Fourth and Fifth Circuits’ analyses in Gannett and Schweitzer share several points of commonality. However, the Fifth Circuit in Schweitzer concluded that, if a single-stock fund is frozen to new investment following a corporate spin-off, it should not be treated as an investment offered under the plan. In addition, unlike the Fourth Circuit in Gannett, the Fifth Circuit considered participant choice in evaluating the defendants’ motion to dismiss, rather than treating it as an affirmative defense that would have to be addressed at a later stage of the proceedings.

Following the Fifth Circuit’s decision, the plaintiffs petitioned the entire Fifth Circuit for rehearing en banc, which was denied on October 8, 2020. The plaintiffs have not yet filed a petition for writ of certiorari with the U.S. Supreme Court.

Potential Circuit Split

With respect to ERISA’s duty of diversification, the Fourth Circuit’s decision in Gannett appears to create a circuit split with Fifth Circuit’s decision in Schweitzer and the Second Circuit’s prior decision in Young v. General Motors Investment Management Corp. In Young, the Second Circuit held that the duty of diversification under ERISA § 404(a)(1)(C) does not extend to the individual fund level. Rather, the court explained that “[t]he language of [§ 404(a)(1)(C)] contemplates a failure to diversify claim when a plan is undiversified as a whole. In Gannett, the Fourth Circuit panel acknowledged the Second Circuit’s holding, but concluded that Young was distinguishable because it did not address the duty of prudence under ERISA § 404(a)(1)(B), which includes the sub-duty of diversification. The court in Gannett also attempted to reconcile its holding with Young by noting that the Gannett plaintiffs alleged a lack of diversification at both the plan level and the individual fund level, because the  New Gannett 401(k) plan offered two correlated single-stock funds (the New Gannett Stock Fund and the TEGNA Stock Fund).


It remains to be seen whether the plaintiffs in Schweitzer will ask the Supreme Court to review the Fifth Circuit’s decision. It also remains to be seen whether the Supreme Court will grant certiorari in Gannett to review the circuit split between the Second, Fourth, and Fifth Circuits. Earlier this month, the Supreme Court expressed interest in the dispute by asking the Gannett plaintiffs to respond to Gannett’s petition for review.  As things currently stand, plaintiffs in the Fourth Circuit have a potential roadmap for surviving a motion to dismiss if they challenge the retention of a single-stock fund in their employer’s retirement plan. However, in light of the current split and the potential that other federal courts may add to the split, the application of ERISA’s fiduciary duties of diversification and prudence to single stock funds is unlikely to be resolved absent Supreme Court intervention.