The Woes of Chesapeake Energy Corp (CHK) are Hitting Shareholders Hard, Including its Employees: Report

Thousands of Chesapeake (CHK) 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 percent 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 percent 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, where 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 percent to $15.52 at Monday’s close since its high this year of $25.58 in March. The shares were down nearly 7 percent on Tuesday, hit by a rating downgrade and word the company had increased a new bridge loan.

“Employees are naturally worried,” said 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 percent 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.

Out of more than 13,000 employees, the 4,000 workers who cannot sell shares in the stock plan only represent 5 percent of the plan assets, said Michael Kehs, a Chesapeake spokesman, who declined to give total assets in the plan or plan details.

Those 4,000 employees are newer employees, who likely are making small contributions to the plan, thus accounting for the 5 percent, said Don Stone, managing partner of Chicago-based Plan Sponsor Advisors, a plan consultant.

“But just because they may have small balances in their 401(k) plans doesn’t change the fact that it could be a big percentage of those employees’ money,” Stone said.

According to a Chesapeake’s 2010 filing on its 401(k) plan, which is the latest available, the plan had $490 million in assets as of December 31, 2010. The firm’s 149 union employees are offered a different 401(k) plan that matches employees’ contributions in cash – 50 cents for every dollar up to 4 percent of employees’ salaries, Kehs said.

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,” said 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),” said Ash.

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.

Chesapeake says 95 percent of the plan assets and 98 percent of the vested plan assets can be diversified.

On average, employers match worker contributions up to 3 to 4 percent of their salary, almost always with cash, according to plan consultants. Some companies offer slightly more.

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

Three former employees interviewed by Reuters said they still held Chesapeake shares and were holding onto their stock with the hope that it would rebound.

For others, what was once an attractive perk doesn’t seem that way anymore.

“At the time, I viewed it as a company putting their money where their mouth is,” said one former employee, who has left the company.

Now that he’s in his thirties and has a family, he said he would not be as comfortable with the idea.

Many companies offer an Employee Stock Ownership Plan (ESOP) inside a 401(k) – which is what Chesapeake offers – and supplement it with another kind of retirement benefit plan to provide employees more diversification, according to Michael Keeling, president of the Employee Stock Ownership Plan Association, a trade group. But there is no additional plan available for non-union employees at Chesapeake.


Chesapeake “routinely reviews the plan design and investments taking into account all Internal Revenue Service and Department of Labor guidelines,” the company spokesman said in an email to Reuters.

Principal Financial Group runs the company’s financial literacy education program. According to Principal documents about the program supplied to Reuters by Chesapeake, the company regularly sends educational materials about its 401(k) plan to employees that emphasize the need to diversify.

Five former employees interviewed by Reuters agree that the company makes concerted efforts to educate plan participants.

Despite these efforts, more than one-third of Chesapeake’s plan remains in company stock, down from a high of 77 percent in 2005, but still way above industry average.

The average 401(k) plan had 11.4 percent in company stock at the end of 2010, down from 13 percent in 2009, according to an Aon Hewitt survey of 401(k) plans that, in total, served more than 12 million employees.


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, said 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 401k 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.

By Jessica Toonkel and Matthew Robinson (Additional reporting by Jennifer Cummings; Editing by Lauren Young, Jennifer Merritt and Tim Dobbyn)

Courtesy of Reuters

Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!

Be the first to comment

Leave a Reply

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.