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NEW YORK, May 15 (Reuters) – Thousands of Chesapeake workers have retirement portfolios that are heavily invested in Chesapeake stock, which has declined sharply following revelations about Chief Executive Aubrey K. McClendon's business dealings.

But while retail and institutional investors have sold the stock, employees don't always have that option.

Overall, 38% of Chesapeake Energy's Savings & Incentive Stock Bonus Plan - the only 401(k) plan available to the majority of the firm's employees - is in company stock, far above the 10% many plan consultants advise.

Currently, Chesapeake says about 4,000 employees are restricted from selling shares the company puts into their retirement portfolios to "match" the employee's own contribution in the plan.

Most companies stopped offering 401(k) matches in stock after the 2001 collapse of Enron Corp, when employees were unable to sell their shares as the company went bankrupt.

Despite regulatory reforms aimed at reducing worker exposure to employer stock, Chesapeake is among a minority of companies that still offer 401(k) matching contribution in shares, highlighting the risk of tying a worker's nest egg to an employer's success.

Chesapeake's stock had dropped almost 40% to $15.52 at Monday's close since its high this year of $25.58 in March. The shares were down nearly 7% on Tuesday, hit by a rating downgrade and word the company had increased a new bridge loan.

"Employees are naturally worried," says Greg Womack, an Edmond, Oklahoma-based financial adviser who says he has been fielding calls from concerned Chesapeake employees. "If the stock doesn't recover, this is a substantial part of people's retirement."

Chesapeake's retirement plan, to be sure, has been a generous one, and helped put the Oklahoma City-based company on Fortune's 100 Best Places to Work since 2008.

The company matches every dollar a salaried employee invests in the 401(k) plan - up to 15% of an employee's salary - with shares of stock. That's more than three times the typical match.

Stock matching programs help companies keep employee interests aligned with corporate goals. They also offer big tax benefits and substantial financial savings to companies.

Chesapeake requires employees in its retirement plan to hold stock for the maximum amount of time allowed by law: until they have been employed for three years or have reached age 55.

"Chesapeake has created a fairly volatile situation here," says Greg Ash, a partner at Kansas City-based Spencer Fane Britt & Browne LLP, which represents employers on retirement plan issues. "In an industry in which the stock price can go up and down quickly and especially with all of the recent headlines, I would hope they are talking about removing the three-year lock in [for the employee match.]”

Chesapeake's workers can invest their own contributions in company stock or in an array of more than 28 investment options, according to BrightScope, which tracks 401(k) plans and rates the plan above-average compared to its peers.

Only 12% of companies provide a company stock match, down from 45% in 2001, according to benefits consultancy Aon Hewitt. And only 1.2% of plans that give a match in company stock do not allow employees to sell that stock immediately.

From 1997 through July 2010, 211 class action lawsuits were filed against employers over company stock, according to Cornerstone Research.

While these cases tend to be dismissed or settled, the threat of a suit and the bad publicity and legal hassles that come with it has led many companies to stop offering stock matches, says Bill McClain, a consultant for Mercer who advises 401(k) plans.

"If you have major movement in the company stock it could be very well made into a lawsuit," McClain said.

But it could be hard to get traction for litigation, given that Chesapeake's 401(k) plan is an ESOP.

In a regular 401(k) plan with a company stock fund, it would be easier to make a case that the plan should have removed the stock fund if the stock fell dramatically, said Elizabeth Nedrow, a partner at Holland & Hart LLP, who represents employers in these cases.

"That argument is harder to make with an ESOP because by statute there is a presumption that the plan is supposed to invest in company stock," Nedrow says.

© 2011 Thomson Reuters. Click for Restrictions.

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