9. Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering most U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law.

On December 21, 2011, the Company made a $5,000,000 discretionary payment into its salaried pension plan. The major reasons why the Company made this discretionary payment were to reduce current year tax payments, to reduce future years’ pension expense, and to attempt to take advantage of the spread between borrowing rates and expected investment return.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

Components of the net periodic benefit cost of the Company’s pension benefit plans were as follows:

	2013			2012			2011
Service cost	$	3,028,863		$	2,642,373		$	2,141,306
Interest cost		2,840,622			2,868,528			2,949,672
Expected return on plan assets		(4,827,393	)		(3,930,988	)		(3,650,282	)
Amortization of prior service cost		256,459			221,049			194,148
Amortization of the net loss		1,844,139			1,111,900			897,052
Net periodic benefit cost	$	3,142,690		$	2,912,862		$	2,531,896

Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows:

	2013			2012			2011
Discount rate		3.90	%		4.55	%		5.35	%
Expected return on plan assets		8.0	%		8.0	%		8.5	%
Rate of compensation increase		3.25	%		3.25	%		4.25	%

Components of the net periodic benefit cost of the Company’s postretirement benefit plan were as follows:

	2013			2012			2011
Service cost	$	202,568		$	173,613		$	126,464
Interest cost		142,086			143,388			136,752
Expected return on plan assets		(73,920	)		(46,255	)		(52,920	)
Amortization of prior service cost		(23,888	)		(23,889	)		(23,888	)
Amortization of the net loss		(4,608	)		(50,784	)		(46,380	)
Net periodic benefit cost	$	242,238		$	196,073		$	140,028

Assumptions used to determine net periodic benefit cost for the Company’s postretirement plan for the fiscal year indicated were as follows:

	2013			2012			2011
Discount rate		3.90	%		4.55	%		5.35	%
Expected return on plan assets		8.0	%		8.0	%		8.5	%

As of December 28, 2013 and December 29, 2012, the status of the Company’s pension benefit plans and postretirement benefit plan was as follows:

	Pension Benefit						Postretirement Benefit
	2013			2012			2013			2012
Benefit obligation at beginning of year	$	74,825,969		$	64,709,379		$	3,712,505		$	3,069,155
Change due to availability of final actual assets and census data		—			—			—			151,397
Plan amendment		132,378			831,201			—			—
Service cost		3,028,863			2,642,373			202,568			173,613
Interest cost		2,840,622			2,868,528			142,086			143,388
Actuarial (gain)/loss		(7,187,997	)		6,117,680			(498,446	)		301,076
Benefits paid		(2,428,637	)		(2,343,192	)		(138,238	)		(126,124	)
Benefit obligation at end of year	$	71,211,198		$	74,825,969		$	3,420,475		$	3,712,505

	Pension Benefit						Postretirement Benefit
	2013			2012			2013			2012
Fair value of plan assets at beginning of year	$	54,644,608		$	48,897,760		$	1,204,779		$	1,215,998
Change due to availability of final actual assets and census data		—			—			12,577			(3,005	)
Actual return on plan assets		4,880,381			4,311,348			73,920			46,255
Employer contributions		3,254,635			3,778,692			34,565			71,655
Benefits paid		(2,428,637	)		(2,343,192	)		(138,238	)		(126,124	)
Fair value of plan assets at end of year	$	60,350,987		$	54,644,608		$	1,187,603		$	1,204,779

	Pension Benefit						Postretirement Benefit
Funded Status	2013			2012			2013			2012
Net amount recognized in the balance sheet	$	(10,860,211	)	$	(20,181,361	)	$	(2,232,872	)	$	(2,507,726	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit						Postretirement Benefit
	2013			2012			2013			2012
Net loss	$	(19,261,651	)	$	(28,346,776	)	$	(115,052	)	$	(621,467	)
Prior service (cost) credit		(813,855	)		(937,936	)		111,508			135,396
	$	(20,075,506	)	$	(29,284,712	)	$	(3,544	)	$	(486,071	)

Change in the components of accumulated other comprehensive income consist of:

	Pension Benefit						Postretirement Benefit
	2013			2012			2013			2012
Balance at beginning of period	$	(29,284,712	)	$	(24,049,140	)	$	(486,071	)	$	44,080
Change due to availability of final actual assets and census data		—			—			12,577			(154,402	)
Charged to net periodic benefit cost
Prior service cost		256,459			221,049			(23,888	)		(23,889	)
Net loss (gain)		1,844,139			1,111,900			(4,608	)		(50,784	)
Other changes
Liability (gains)/losses		7,108,608			(6,568,521	)		498,446			(301,076	)
Balance at end of period	$	(20,075,506	)	$	(29,284,712	)	$	(3,544	)	$	(486,071	)

In 2014, the net periodic pension benefit cost will include $944,130 of net loss and $218,585 of prior service cost and the net periodic postretirement benefit cost will include $0 of net gain and $24,000 of prior service credit.

Assumptions used to determine the projected benefit obligations for the Company’s pension benefit plans and postretirement benefit plan for the fiscal year indicated were as follows:

	2013			2012
Discount rate		4.80	%		3.90	%
Expected return on plan assets		8.0	%		8.0	%
Rate of compensation increase		3.25	%		3.25	%

In 2013 and 2012, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $71,403,778 and $66,735,124, respectively.

Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:

	2013			2012
Number of plans	5*				6
Projected benefit obligation	$	68,781,752		$	74,825,969
Accumulated benefit obligation		68,974,332			66,735,124
Fair value of plan assets		57,850,937			54,644,608
Net amount recognized in accrued benefit liability		(10,930,815	)		(20,181,361	)

* Information relating to one of the Company’s pension plans is excluded from the above table as this plan was over-funded by approximately $70,000 at December 28, 2013.

Estimated future benefit payments to participants of the Company’s pension plans are $2.8 million in 2014, $2.9 million in 2015, $3.0 million in 2016, $3.1 million in 2017, $3.2 million in 2018 and a total of $19.1 million from 2019 through 2023.

Estimated future benefit payments to participants of the Company’s postretirement plan are $164,000 in 2014, $172,000 in 2015, $184,000 in 2016, $193,000 in 2017, $202,000 in 2018 and a total of $1,186,000 from 2019 through 2023.

The Company expects to make cash contributions to its qualified pension plans of approximately $2.5 million and to its postretirement plan of approximately $63,000 in 2014.

We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes and consider the expected positive impact of active investment management. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities and fixed income securities.

We consider a variety of factors in determining and selecting our assumptions for the discount rate at the end of the year. We develop a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the Citigroup Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds.

The fair values of the company’s pension plans assets at December 28, 2013 and December 29, 2012, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 28, 2013
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	204,874	$	—	$	204,874
Equities:
The Eastern Company Common Stock		3,082,494		—		—		3,082,494
Common/collective trust funds
U.S. Large Cap (a)		—		6,643,640		—		6,643,640
U.S. Small Cap (b)		—		4,485,040		—		4,485,040
Concentrated Equity (c)		—		5,578,600		—		5,578,600
International Large Cap with Active Currency (d)		—		7,788,246		—		7,788,246
Emerging Market (e)		—		3,231,355		—		3,231,355
Fixed Income:
Common/collective trust funds
Intermediate Bond (f)		—		15,817,474		—		15,817,474
Target Duration LDI Fixed Income Funds (g)
· 6 Year LDI Fund		—		211,661		—		211,661
· 8 Year LDI Fund		—		211,101		—		211,101
· 10 Year LDI Fund		—		316,556		—		316,556
· 12 Year LDI Fund		—		845,278		—		845,278
· 14 Year LDI Fund		—		1,108,960		—		1,108,960
· 16 Year LDI Fund		—		475,035		—		475,035
Long Duration Fixed Credit (h)		—		7,363,673		—		7,363,673
Insurance contracts		—		2,689,979		—		2,689,979
Total	$	3,082,494	$	56,971,472	$	—	$	60,053,966

	December 29, 2012
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	193,497	$	—	$	193,497
Equities:
The Eastern Company Common Stock		3,063,132		—		—		3,063,132
Common/collective trust funds
U.S. Large Cap		—		5,826,726		—		5,826,726
U.S. Small Cap		—		3,964,072		—		3,964,072
Concentrated Equity		—		4,899,023		—		4,899,023
International Large Cap with Active Currency		—		6,999,997		—		6,999,997
Emerging Market		—		3,017,350		—		3,017,350
Fixed Income:
Common/collective trust funds
Intermediate Bond		—		14,368,745		—		14,368,745
Target Duration LDI Fixed Income Funds						—
· 6 Year LDI Fund		—		215,604				215,604
· 8 Year LDI Fund		—		214,968				214,968
· 10 Year LDI Fund		—		306,535				306,535
· 12 Year LDI Fund		—		824,342				824,342
· 14 Year LDI Fund		—		1,087,074				1,087,074
· 16 Year LDI Fund		—		426,544				426,544
Long Duration Fixed Credit		—		6,684,999		—		6,684,999
Insurance contracts		—		2,552,000		—		2,552,000
Total	$	3,063,132	$	51,581,476	$	—	$	54,644,608

Equity common funds primarily hold publicly traded common stock of both U.S and international companies selected for purposes of total return and to maintain equity exposure consistent with policy allocations. The level 1 investment is made up of shares of The Eastern Company Common Stock and is valued at market price. Level 2 investments include commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities.

(a)

The investment objective of the large cap fund is to outperform the Russell 1000® Index. The fund is designed to provide for long-term growth of capital by utilizing a diversified group of quantitative investment strategies that seek to identify securities that have exposure to factors that the underlying advisors’ research has found to be predictive of future excess returns. The advisors’ portfolios are quantitatively structured to gain exposure to these predictive characteristics while minimizing unintended risk exposures.

(b)

The small cap fund has an objective to outperform the Russell 2500® Index The fund is designed to achieve consistency by combining advisors whose complementary disciplined processes employ distinct methods for identifying small capitalization U.S. stocks with strong return potential. Advisors in the fund use a wide range of criteria and disciplines in their stock selection, focusing on factors such as: undervalued or under-researched companies, special situations, emerging growth, asset plays or turnarounds.

(c)

The investment objective of the concentrated equity fund is to outperform the Russell 1000® Index. The fund is designed to achieve this by combining strategies with different payoffs over different phases of an economic and stock market cycle. To help achieve this objective, multiple advisors and strategies are employed to reduce “scenario risk.” These multiple strategies are in the form of multiple investment styles (e.g., growth, market oriented, and value), multiple sub-styles, and different ways of identifying undervalued securities.

(d)

The international fund with active currency has an investment objective of outperforming the Russell Development ex-U.S. Large Cap Index Net. The fund is designed to provide the potential for long-term growth of capital by utilizing a diversified group of investment advisors that the Trustee’s manager’s research indicates will outperform over a full market cycle. The investment advisors’ portfolios are combined to form a fund that emphasizes their strengths while minimizing unintended risk exposures.

(e)

The emerging market fund seeks to outperform the Russell Emerging Markets Index Net. The fund is designed to provide the potential for long-term growth of capital by utilizing a diversified market group of investment advisors that the Trustee’s manager’s research indicates will outperform over a full market cycle. The investment advisors’ portfolios are combined to form a fund that emphasizes their strengths while minimizing unintended risk exposures.

All equity funds have an objective to beat their respective indices with above-average consistency while maintaining volatility and diversification similar to the index they are being compared to over a full market cycle.

Fixed income common funds primarily hold government and corporate debt securities selected for purposes of total return and managing fixed income exposure to policy allocations. Investments include fixed commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities.

(f)

Fixed income common fund investments have an investment objective of outperforming the Barclays Capital U.S. Aggregate Bond Index over a full market cycle. The fund is designed to provide current income, and as a secondary objective, capital appreciation through a variety of diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. To help achieve the objective, the fund is actively managed by multiple advisors who use a variety of investment strategies to create a broad market exposure. The fund’s advisors have distinct but complementary investment styles. These advisors generally have similar universes of investable securities but have different areas of specialization and expertise within intermediate duration securities.

(g)

The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds seek to provide current income, and as a secondary objective, capital appreciation through diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The Funds will generally be used in combination with other bond funds to enable the plans to gain additional credit exposure within their asset portfolio, with the goal of reducing the mismatch between a plan’s assets and liabilities.

(h)

The long duration fixed credit fund seeks to outperform the Barclays Capital Long Credit Index over a full market cycle. The fund seeks to provide current income, and as a secondary objective, capital appreciation through diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The fund will generally be used in combination with other bond funds, with the goal of reducing the mismatch between a plan’s assets and liabilities.

The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents, and other investments, which may reflect varying rates of return. The investments are further diversified within each asset classification. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. The Company has elected to change its investment strategy to better match the assets with the underlying plan liabilities. Currently, the long-term target allocations for plan assets are 50% in equities and 50% in fixed income, with 20% of the fixed income investments being in long-duration instruments, although the actual plan asset allocations may be within a range around these targets. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations. It is expected that, as the funded status of the plans improves, more assets will be invested in long-duration fixed income instruments.

The plans’ assets include 193,624 shares of the common stock of the Company having a market value of $3,082,494 and $3,063,132 at December 28, 2013 and December 29, 2012, respectively. No shares were purchased or sold in 2013 or 2012. Dividends received during 2013 and 2012 on the common stock of the Company were $81,322 and $96,812 respectively.

The fair values of the Company’s postretirement plan assets at December 28, 2013 and December 29, 2012, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 28, 2013
	Level 1		Level 2		Level 3		Total
Fixed Income:
Insurance contracts	$	—	$	—	$	1,187,603	$	1,187,603
Total	$	—	$	—	$	1,187,603	$	1,187,603

	December 29, 2012
	Level 1		Level 2		Level 3		Total
Fixed Income:
Insurance contracts	$	—	$	—	$	1,204,779	$	1,204,779
Total	$	—	$	—	$	1,204,779	$	1,204,779

The level 3 asset consists of an insurance contract with The Prudential Life Insurance Company of America. It is designed to provide life insurance benefits for eligible retirees of the Company. The contract is valued annually by the insurance company, based on activity in the account. An analysis of the Level 3 asset of the Company’s postretirement plan is as follows:

	2013			2012
Fair value of Level 3 assets at beginning of year	$	1,204,779		$	1,215,998
Change due to availability of final actual assets and census data		12,577			(3,005	)
Actual return on plan assets		73,920			46,255
Employer contributions		34,565			71,655
Benefits paid		(138,238	)		(126,124	)
Fair value of Level 3 assets at end of year	$	1,187,603		$	1,204,779

The Level 3 assets described above are the only assets of the postretirement plan, and thus have no impact on any Level 1 or Level 2 assets.

For measurement purposes relating to the postretirement benefit plan, the life insurance cost trend rate is 1%. The health care cost trend rate for participants retiring after January 1, 1991 is nil; no increase in that rate is expected because of caps placed on benefits. The health care cost trend rate is expected to remain at 4.5% for participants after the year 2000.

A one-percentage-point change in assumed health care cost trend rates would have the following effects on the postretirement benefit plan:

	1-Percentage Point
	Increase		Decrease
Effect on total of service and interest cost components	$	58,361	$	(47,201	)

Effect on postretirement benefit obligation	$	514,000	$	(423,068	)

U.S. salaried employees and most employees of the Company’s Canadian subsidiaries are covered by defined contribution plans.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. The plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion. The Company made contributions of $194,068 in 2013, $187,531 in 2012, and in 2011, $179,400.