Significant attention has been paid to the Supreme Court ruling this year inLaRue v. DeWolff, Boberg & Associates, which allows 401(k) participants to sue fiduciaries.

The ruling was so controversial because - contrary to the prior case law, which generally held that a complaint must be brought on behalf of the plan as a whole - the ruling applied to individual participants.

In the more recent case, Cook v. Campbell, the U.S. District Court for the middle district of Alabama rejected a request to apply LaRue to a claim for breach of fiduciary duty against an employee stock ownership plan.

The court drew several distinctions between a 401(k) plan and an ESOP, although both are defined contribution plans.

It is important to understand the original issues in Cook v. Campbell. Central Alabama Home Health Services adopted an ESOP and created a trust; Central Alabama agreed to make annual contributions in the form of cash and Central Alabama stock.

The ESOP enabled participating employees to share in the growth of the company and accumulate capital for retirement.

Employees were eligible for the ESOP after three months of employment, and contributions were allocated in accordance with employee compensation.

Eligible employees were entitled to receive the vested portion of their accounts at termination, disability, death or retirement.

The employees were told that an outside appraiser would annually evaluate the fair market value of the stock in the ESOP in accordance with generally accepted valuation methods.

After the ESOP was created, Central Alabama's owner and president George Hutchinson announced he would sell 80% of his Central Alabama stock to the ESOP and retain a 20% ownership in the company. Participants were informed that this transaction would increase the value of the ESOP shares.

At the same time as Hutchinson's announcement, Central Alabama announced it would need to downsize because of changes within the health care industry.

To avoid layoffs, Central Alabama implemented a career transition assistance plan, which was described as a creative alternative to downsizing. Employees who participated in this arrangement would receive a one-time severance payment and the vested portion of their ESOP stock within one year.

Cook and approximately 124 other employees elected to participate in this arrangement, expecting to receive shares of ESOP stock equal to or exceeding the value announced as of the last valuation date. However, when ESOP distributions were made, they represented a small fraction of the prior valuation amount.

The employees claimed that the value of the ESOP shares was artificially inflated specifically to deceive employees into accepting the career transition assistance plan.

They also alleged that Campbell and others were to blame for overvaluating the ESOP and the subsequent reduction of value. They claimed that the trustees breached their fiduciary duties, adversely affecting the value of company stock.

Since the plaintiffs were seeking damages on their own behalf, not on behalf of the plan, the court held that they could not sue Campbell, as the ESOP trustee, for breach of fiduciary duty under ERISA.

This is consistent with the Supreme Court decision in Massachusetts Mutual Life Insurance Co. v. Russell, since the plaintiffs did not bring their case on behalf of the plan as a whole, or as an entire entity.

Later, the plaintiffs in the Cook case attempted to rely on the LaRue decision in asking the court to reconsider the case and reverse its prior ruling. The court rejected the plaintiffs' request to reconsider this case in light of LaRue.

It also held that the plaintiffs had not exhausted their administrative remedies. Failure to exhaust administrative remedies will usually result in a dismissal of an ERISA complaint, since participants must follow all administrative procedures contained in a plan document, as required under ERISA, before proceeding to litigation.

The LaRue case involved a 401(k) plan where an individual's investment instructions were not followed. In an ESOP, no individual participant direction exists.

Instead, employer stock is allocated under a formula for all participant accounts.

The entire plan theory will continue to apply to ESOPs, and possibly some 401(k) situations, since all participants would be equally affected by any fiduciary breaches.

The Cook decision is important to all employers, plan sponsors and 401(k) service providers because it illustrates that LaRue may not be extended as broadly as previously anticipated. This will be good news in limiting future liability.

Nevertheless, employers should still place administrative compliance in the forefront to minimize liabilities in possible future litigation.