Note 11. Retirement Plans

Our defined benefit and defined contribution plans cover substantially all of our employees. A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined contribution component. The defined benefit component of the arrangement includes the Textron Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and the defined contribution component is the Retirement Account Plan (RAP). The defined benefit component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants are eligible to receive contributions from Textron of 2% of their eligible compensation but may not make contributions to the plan. Upon retirement, participants receive the greater of the floor benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective on January 1, 2010, the Textron Retirement Plan was closed to new participants, and employees hired after that date receive an additional 4% annual cash contribution to their Textron Savings Plan account based on their eligible compensation.

We also have domestic and foreign funded and unfunded defined benefit pension plans that cover certain of our U.S. and foreign employees. In addition, several defined contribution plans are sponsored by our various businesses, of which the largest plan is the Textron Savings Plan, which is a qualified 401(k) plan subject to ERISA. Our defined contribution plans cost approximately $93 million, $88 million and $85 million in 2013, 2012 and 2011, respectively; these amounts include $19 million, $21 million and $23 million, respectively, in contributions to the RAP. We also provide postretirement benefits other than pensions for certain retired employees in the U.S., which include healthcare, dental care, Medicare Part B reimbursement and life insurance benefits.

Periodic Benefit Cost

The components of our net periodic benefit cost and other amounts recognized in OCI are as follows:

	Pension Benefits									Postretirement Benefits Other than Pensions
(In millions)	2013			2012			2011				2013			2012			2011
Net periodic benefit cost
Service cost	$	133		$	119		$	129			$	6		$	6		$	8
Interest cost	290			305			327				19			25			33
Expected return on plan assets	(418		)	(407		)	(393		)		—			—			—
Amortization of prior service cost (credit)	15			16			16				(17		)	(11		)	(8		)
Amortization of net actuarial loss	183			118			75				6			7			11
Curtailment and special termination charges	—			—			(1		)		—			—			—
Net periodic benefit cost	$	203		$	151		$	153			$	14		$	27		$	44
Other changes in plan assets and benefit obligations recognized in OCI
Current year actuarial loss (gain)	$	(964	)	$	402		$	556			$	(55	)	$	15		$	(17	)
Current year prior service cost (credit)	16			—			7				(45		)	(2		)	(23		)
Amortization of net actuarial loss	(183		)	(118		)	(75		)		(6		)	(7		)	(11		)
Amortization of prior service credit (cost)	(15		)	(16		)	(16		)		17			11			8
Curtailments and settlements	—			—			1				—			—			—
Total recognized in OCI, before taxes	$	(1,146	)	$	268		$	473			$	(89	)	$	17		$	(43	)
Total recognized in net periodic benefit cost and OCI	$	(943	)	$	419		$	626			$	(75	)	$	44		$	1

The estimated amount that will be amortized from Accumulated other comprehensive loss into net periodic pension costs in 2014 is as follows:

(In millions)	Pension Benefits		Postretirement Benefits Other than Pensions
Net actuarial loss	$	112	$	2
Prior service cost (credit)	15		(22		)
	$	127	$	(20	)

Obligations and Funded Status

All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows:

	Pension Benefits							Postretirement Benefits Other than Pensions
(In millions)		2013			2012				2013			2012
Change in benefit obligation
Benefit obligation at beginning of year		$	7,053		$	6,325			$	564		$	561
Service cost		133			119				6			6
Interest cost		290			305				19			25
Amendments		16			—				(45		)	(2		)
Plan participants’ contributions		—			—				4			5
Actuarial losses (gains)		(566		)	644				(55		)	15
Benefits paid		(373		)	(360		)		(48		)	(52		)
Foreign exchange rate changes		(13		)	29				—			—
Other		4			(9		)		—			6
Benefit obligation at end of year		$	6,544		$	7,053			$	445		$	564
Change in fair value of plan assets
Fair value of plan assets at beginning of year		$	5,715		$	5,013
Actual return on plan assets		819			649
Employer contributions		185			389
Benefits paid		(373		)	(360		)
Foreign exchange rate changes		(1		)	24
Fair value of plan assets at end of year		$	6,345		$	5,715
Funded status at end of year		$	(199	)	$	(1,338	)		$	(445	)	$	(564	)

Amounts recognized in our balance sheets are as follows:

	Pension Benefits							Postretirement Benefits Other than Pensions
(In millions)		2013			2012				2013			2012
Non-current assets		$	413		$	61			$	—		$	—
Current liabilities		(26		)	(26		)		(48		)	(52		)
Non-current liabilities		(586		)	(1,373		)		(397		)	(512		)
Recognized in Accumulated other comprehensive loss, pre-tax:
Net loss		1,596			2,750				38			99
Prior service cost (credit)		114			113				(69		)	(41		)

The accumulated benefit obligation for all defined benefit pension plans was $6.1 billion and $6.6 billion at December 28, 2013 and December 29, 2012, respectively, which included $359 million and $388 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible.

Pension plans with accumulated benefit obligations exceeding the fair value of plan assets are as follows:

(In millions)	2013		2012
Projected benefit obligation	$	2,828	$	6,869
Accumulated benefit obligation	2,629		6,404
Fair value of plan assets	2,215		5,470

Assumptions

The weighted-average assumptions we use for our pension and postretirement plans are as follows:

	Pension Benefits				Postretirement Benefits Other than Pensions
		2013	2012	2011	2013	2012	2011
Net periodic benefit cost
Discount rate		4.23%	4.94%	5.71%	3.75%	4.75%	5.50%
Expected long-term rate of return on assets		7.56%	7.58%	7.84%
Rate of compensation increase		3.31%	3.49%	3.99%
Benefit obligations at year-end
Discount rate		4.94%	4.23%	4.95%	4.50%	3.75%	4.75%
Rate of compensation increases		3.34%	3.48%	3.49%

Assumed healthcare cost trend rates are as follows:

	2013	2012
Medical cost trend rate	7.2%	8.4%
Prescription drug cost trend rate	7.2%	8.4%
Rate to which medical and prescription drug cost trend rates will gradually decline	5.0%	5.0%
Year that the rates reach the rate where we assume they will remain	2021	2021

These assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefits other than pensions. A one-percentage-point change in these assumed healthcare cost trend rates would have the following effects:

(In millions)	One- Percentage- Point Increase		One- Percentage- Point Decrease
Effect on total of service and interest cost components	$	2	$	(2	)
Effect on postretirement benefit obligations other than pensions	23		(21		)

Pension Assets

The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return, over the long term, sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. All of the assets are managed by external investment managers, and the majority of the assets are actively managed. Where possible, investment managers are prohibited from owning our stock in the portfolios that they manage on our behalf.

For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. For foreign plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. Our target allocation ranges are as follows:

U.S. Plan Assets
Domestic equity securities		26% to 40%
International equity securities		11% to 22%
Debt securities		25% to 35%
Private equity partnerships		5% to 11%
Real estate		7% to 13%
Hedge funds		0% to 5%
Foreign Plan Assets
Equity securities		38% to 65%
Debt securities		29% to 38%
Real estate		3% to 14%

The fair value of total pension plan assets by major category and level in the fair value hierarchy as defined in Note 8 is as follows:

	December 28, 2013							December 29, 2012
(In millions)		Level 1		Level 2		Level 3			Level 1		Level 2		Level 3
Cash and equivalents		$	17	$	144	$	—		$	16	$	157	$	—
Equity securities:
Domestic		1,179		866		—			1,149		560		—
International		1,140		258		—			981		268		—
Debt securities:
National, state and local governments		506		411		—			594		318		—
Corporate debt		—		638		—			13		647		—
Asset-backed securities		—		153		—			1		91		—
Private equity partnerships		—		—		305			—		—		308
Real estate		—		—		553			—		—		508
Hedge funds		—		—		175			—		—		104
Total		$	2,842	$	2,470	$	1,033		$	2,754	$	2,041	$	920

Cash equivalents and equity and debt securities include comingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. Since these comingled funds are not quoted on any active market, they are priced based on the relative value of the underlying equity and debt investments and their individual prices at any given time; accordingly, they are classified as Level 2. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors.

Private equity partnerships represent investments in funds, which, in turn, invest in stocks and debt securities of companies that, in most cases, are not publicly traded. These partnerships are valued using income and market methods that include cash flow projections and market multiples for various comparable companies. Real estate includes owned properties and investments in partnerships. Owned properties are valued using certified appraisals at least every three years, which then are updated at least annually by the real estate investment manager based on current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Real estate partnerships are valued similar to private equity partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their fund portfolios. We believe these assumptions are consistent with assumptions that market participants would use in valuing these investments.

Hedge funds represent an investment in a diversified fund of hedge funds of which we are the sole investor. The fund invests in portfolio funds that are not publicly traded and are managed by various portfolio managers. Investments in portfolio funds are typically valued on the basis of the most recent price or valuation provided by the relevant fund’s administrator. The administrator for the fund aggregates these valuations with the other assets and liabilities to calculate the net asset value of the fund.

The table below presents a reconciliation of the beginning and ending balances for fair value measurements that use significant unobservable inputs (Level 3) by major category:

(In millions)	Hedge Funds		Private Equity Partnerships			Real Estate
Balance at beginning of year	$	104	$	308		$	508
Actual return on plan assets:
Related to assets still held at reporting date	16		(5		)	26
Related to assets sold during the period	—		44			23
Purchases, sales and settlements, net	55		(42		)	(4		)
Balance at end of year	$	175	$	305		$	553

Estimated Future Cash Flow Impact

Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2014, we expect to contribute approximately $58 million to fund non-qualified plans and foreign plans, and $19 million to the RAP. We do not expect to contribute to our qualified pension plans or our other postretirement benefit plans. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. These payments are based on the same assumptions used to measure our benefit obligation at the end of fiscal 2013. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets. Benefit payments that we expect to pay are as follows:

(In millions)	2014		2015		2016		2017		2018		2019-2023
Pension benefits	$	367	$	369	$	373	$	378	$	384	$	2,047
Post-retirement benefits other than pensions	49		48		46		44		42		171