10. 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.

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:

	2014			2013			2012
Service cost	$	2,837,134		$	3,028,863		$	2,642,373
Interest cost		3,365,194			2,840,622			2,868,528
Expected return on plan assets		(4,810,524	)		(4,827,393	)		(3,930,988	)
Amortization of prior service cost		218,585			256,459			221,049
Amortization of the net loss		944,130			1,844,139			1,111,900
Net periodic benefit cost	$	2,554,519		$	3,142,690		$	2,912,862

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

	2014			2013			2012
Discount rate		4.80	%		3.90	%		4.55	%
Expected return on plan assets		8.0	%		8.0	%		8.0	%
Rate of compensation increase		3.25	%		3.25	%		3.25	%

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

	2014			2013			2012
Service cost	$	173,902		$	202,568		$	173,613
Interest cost		157,481			142,086			143,388
Expected return on plan assets		(22,434	)		(73,920	)		(46,255	)
Amortization of prior service cost		(23,888	)		(23,888	)		(23,889	)
Amortization of the net loss		(72,378	)		(4,608	)		(50,784	)
Net periodic benefit cost	$	212,683		$	242,238		$	196,073

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

	2014			2013			2012
Discount rate		4.80	%		3.90	%		4.55	%
Expected return on plan assets		8.0	%		8.0	%		8.0	%

As of January 3, 2015 and December 28, 2013, the status of the Company’s pension benefit plans and postretirement benefit plan was as follows:

	Pension Benefit						Postretirement Benefit
	2014			2013			2014			2013
Benefit obligation at beginning of year	$	71,211,198		$	74,825,969		$	3,420,475		$	3,712,505
Change due to availability of final actual assets and census data		—			—			(56,516	)		—
Plan amendment		—			132,378			—			—
Service cost		2,837,134			3,028,863			173,902			202,568
Interest cost		3,365,194			2,840,622			157,481			142,086
Actuarial (gain)/loss		15,697,087			(7,187,997	)		497,488			(498,446	)
Benefits paid		(2,593,691	)		(2,428,637	)		(137,718	)		(138,238	)
Benefit obligation at end of year	$	90,516,922		$	71,211,198		$	4,055,112		$	3,420,475

	Pension Benefit						Postretirement Benefit
	2014			2013			2014			2013
Fair value of plan assets at beginning of year	$	60,350,987		$	54,644,608		$	1,187,603		$	1,204,779
Change due to availability of final actual assets and census data		—			—			(2,451	)		12,577
Actual return on plan assets		3,731,262			4,880,381			22,434			73,920
Employer contributions		2,863,552			3,254,635			79,336			34,565
Benefits paid		(2,593,691	)		(2,428,637	)		(137,718	)		(138,238	)
Fair value of plan assets at end of year	$	64,352,110		$	60,350,987		$	1,149,204		$	1,187,603

	Pension Benefit								Postretirement Benefit
Funded Status	2014				2013				2014				2013
Net amount recognized in the balance sheet		$	(26,164,812	)		$	(10,860,211	)		$	(2,905,908	)		$	(2,232,872	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit								Postretirement Benefit
	2014				2013				2014				2013
Net loss		$	(35,093,871	)		$	(19,261,651	)		$	(630,853	)		$	(115,052	)
Prior service (cost) credit			(595,270	)			(813,855	)			87,620				111,508
		$	(35,689,141	)		$	(20,075,506	)		$	(543,233	)		$	(3,544	)

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

	Pension Benefit						Postretirement Benefit
	2014			2013			2014			2013
Balance at beginning of period	$	(20,075,506	)	$	(29,284,712	)	$	(3,544	)	$	(486,071	)
Change due to availability of final actual assets and census data		—			—			54,065			12,577
Charged to net periodic benefit cost
Prior service cost		218,585			256,459			(23,888	)		(23,888	)
Net loss (gain)		944,130			1,844,139			(72,378	)		(4,608	)
Other changes
Liability (gains)/losses		(16,776,350	)		7,108,608			(497,488	)		498,446
Balance at end of period	$	(35,689,141	)	$	(20,075,506	)	$	(543,233	)	$	(3,544	)

In 2015, the net periodic pension benefit cost will include $2,011,179 of net loss and $218,585 of prior service cost and the net periodic postretirement benefit cost will include $19,426 of net gain and $23,888 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:

	2014			2013
Discount rate		3.90	%		4.80	%
Expected return on plan assets		8.0	%		8.0	%
Rate of compensation increase		3.25	%		3.25	%

In 2014 and 2013, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $84,714,136 and $71,403,778, respectively.

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

	2014			2013
Number of plans		6			5	*
Projected benefit obligation	$	90,516,922		$	68,781,752
Accumulated benefit obligation		84,714,136			68,974,332
Fair value of plan assets		64,352,110			57,850,937
Net amount recognized in accrued benefit liability		(26,164,812	)		(10,930,815	)

* 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 $3.1 million in 2015, $3.4 million in 2016, $3.5 million in 2017, $3.8 million in 2018, $4.1 million in 2019 and a total of $24.6 million from 2020 through 2024.

Estimated future benefit payments to participants of the Company’s postretirement plan are $175,000 in 2015, $188,000 in 2016, $197,000 in 2017, $207,000 in 2018, $220,000 in 2019 and a total of $1,259,000 from 2020 through 2024.

The Company expects to make cash contributions to its qualified pension plans of approximately $3.0 million and to its postretirement plan of approximately $150,000 in 2015.

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 January 3, 2015 and December 28, 2013, utilizing the fair value hierarchy discussed in Note 2, follow:

	January 3, 2015
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	1,201,073	$	—	$	1,201,073
Equities:
The Eastern Company Common Stock		3,473,938		—		—		3,473,938
Common/collective trust funds
U.S. Large Cap (a)		—		6,936,880		—		6,936,880
U.S. Small Cap (b)		—		4,632,485		—		4,632,485
Concentrated Equity (c)		—		5,788,864		—		5,788,864
International Large Cap with Active Currency (d)		—		7,606,489		—		7,606,489
Emerging Market (e)		—		3,188,672		—		3,188,672

	January 3, 2015
	Level 1		Level 2		Level 3		Total
Fixed Income:
Common/collective trust funds
Intermediate Bond (f)		—		17,013,171		—		17,013,171
Target Duration LDI Fixed Income Funds (g)
· 6 Year LDI Fund		—		226,826		—		226,826
· 8 Year LDI Fund		—		227,960		—		227,960
· 10 Year LDI Fund		—		343,712		—		343,712
· 12 Year LDI Fund		—		919,538		—		919,538
· 14 Year LDI Fund		—		1,212,739		—		1,212,739
· 16 Year LDI Fund		—		520,522		—		520,522
Long Duration Fixed Credit (h)		—		8,112,746		—		8,112,746
Insurance contracts		—		2,946,495		—		2,946,495
Total	$	3,473,938	$	60,878,172	$	—	$	64,352,110

	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		—		6,643,640		—		6,643,640
U.S. Small Cap		—		4,485,040		—		4,485,040
Concentrated Equity		—		5,578,600		—		5,578,600
International Large Cap with Active Currency		—		7,788,246		—		7,788,246
Emerging Market		—		3,231,355		—		3,231,355
Fixed Income:
Common/collective trust funds
Intermediate Bond		—		15,817,474		—		15,817,474
Target Duration LDI Fixed Income Funds
· 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		—		7,363,673		—		7,363,673
Insurance contracts		—		2,987,000		—		2,987,000
Total	$	3,082,494	$	57,268,493	$	—	$	60,350,987

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 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 202,562 and 193,624 shares of the common stock of the Company having a market value of $3,473,938 and $3,082,494 at January 3, 2015 and December 28, 2013, respectively. During 2014, The Salaried Pension Plan purchased 8,938 shares of common stock at a cost of $146,712. No shares were sold in this period. No shares were purchased or sold in 2013. Dividends received during 2014 and 2013 on the common stock of the Company were $93,507 and $81,322 respectively.

The fair values of the Company’s postretirement plan assets at January 3, 2015 and December 28, 2013, utilizing the fair value hierarchy discussed in Note 2, follow:

	January 3, 2015
	Level 1			Level 2			Level 3			Total
Fixed Income:
Insurance contracts		$	—		$	—		$	1,149,204		$	1,149,204
Total		$	—		$	—		$	1,149,204		$	1,149,204

	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

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:

	2014			2013
Fair value of Level 3 assets at beginning of year	$	1,187,603		$	1,204,779
Change due to availability of final actual assets and census data		(2,451	)		12,577
Actual return on plan assets		22,434			46,013
Employer contributions		19,639			—
Benefits paid		(78,021	)		(75,766	)
Fair value of Level 3 assets at end of year	$	1,149,204		$	1,187,603

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		$	55,785		$	(45,328	)

Effect on postretirement benefit obligation		$	645,868		$	(52,432	)

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 $186,545 in 2014, $194,068 in 2013, and $187,531in 2012.