I push it back in by hand and it slides right out after 1-2 times shifting. I can hold it in place pretty easily by hand but as soon as I take my hand off it pulls out. Almost like it isn't seating into a groove fully? Or defective seal?? Shaft is clean and lube-y. Pretty annoying.
I just check my 'parts' transfer case...that seal should just press into the hole in the transfer case housing...but I think it will take more force than just fingers pressing it back into place, that's why I was thinking that you'd have to remove that link, remove the dust boot from the shaft and slide a tool of sorts over the shaft and press it in real good and straight until it sets, then reinstall the dust boot and link...
On the other end of that shaft (inside the transfer case) is a shift fork, which connects to a 'sleeve' which slides onto/off the gears on the output gear shaft. I can't see how there would be enough play or what is on the shaft (on the other side of the seal) that would push against the shaft to push it out of place. But I didn't rebuild the transfer case, so I can't comment on whether it was done correctly or not.
There is a ball bearing/spring set that holds that selector shaft into each of it's 3 positions, but if it shifts through all three positions (4H, 4N and 4L) and doesn't 'jump' out of gear when put into a position and driven, then I would reckon that that bearing/spring is doing it's job.
I just think that seal either has to be pressed in better or another possibility is that it is the wrong seal for that transfercase and is too small. You'd need to double check parts numbers and sizes, but it might just be easier to confirm the year transfercase you have on there and get another one for that model.
And when reinstalling that dust boot, I'd make sure it is pushed in as far up on the shaft (towards the transfercase) with that shaft shifted as far out as it goes, so that when the shaft shifts (whew...that was a tongue twister...a whole lot of shifting and shafting going on there...thank goodness no sh*tting), it isn't overextending the boot to where it is pulling on the seal (because that boot holds tight over the outer lip of that seal).