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 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:

	2015			2014			2013
Service cost	$	3,770,191		$	2,837,134		$	3,028,863
Interest cost		3,472,870			3,365,194			2,840,622
Expected return on plan assets		(5,151,654	)		(4,810,524	)		(4,827,393	)
Amortization of prior service cost		218,585			218,585			256,459
Amortization of the net loss		1,928,298			944,130			1,844,139
Net periodic benefit cost	$	4,238,290		$	2,554,519		$	3,142,690

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

	2015	2014	2013
Discount rate	3.90%	4.80%	3.90%
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:

	2015			2014			2013
Service cost	$	217,570		$	173,902		$	202,568
Interest cost		154,915			157,481			142,086
Expected return on plan assets		(91,936	)		(22,434	)		(73,920	)
Amortization of prior service cost		(23,889	)		(23,888	)		(23,888	)
Amortization of the net loss		18,804			(72,378	)		(4,608	)
Net periodic benefit cost	$	275,464		$	212,683		$	242,238

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

	2015	2014	2013
Discount rate	3.90%	4.80%	3.90%
Expected return on plan assets	8.0%	8.0%	8.0%

As of January 2, 2016 and January 3, 2015, the status of the Company’s pension benefit plans and postretirement benefit plan was as follows:

	Pension Benefit						Postretirement Benefit
	2015			2014			2015			2014
Benefit obligation at beginning of year	$	90,516,922		$	71,211,198		$	4,055,112		$	3,420,475
Change due to availability of final actual assets and census data		—			—			346			(56,516	)
Discount rate		(4,121,170	)		10,600,944			(87,748	)		445,610
Mortality table		—			2,808,383			—			75,047
Service cost		3,770,191			2,837,134			217,570			173,902
Interest cost		3,472,870			3,365,194			154,915			157,481
Actuarial (gain)/loss		(3,316,552	)		2,287,760			(2,235,904	)		(23,169	)
Benefits paid		(2,894,492	)		(2,593,691	)		(122,947	)		(137,718	)
Benefit obligation at end of year	$	87,427,769		$	90,516,922		$	1,981,344		$	4,055,112

	Pension Benefit						Postretirement Benefit
	2015			2014			2015			2014
Fair value of plan assets at beginning of year	$	64,352,110		$	60,350,987		$	1,149,204		$	1,187,603
Change due to availability of final actual assets and census data		—			—			—			(2,451	)
Actual return on plan assets		(1,340,977	)		3,731,262			39,085			22,434
Employer contributions		3,006,202			2,863,552			122,947			79,336
Benefits paid		(2,894,492	)		(2,593,691	)		(122,947	)		(137,718	)
Fair value of plan assets at end of year	$	63,122,843		$	64,352,110		$	1,188,289		$	1,149,204

	Pension Benefit						Postretirement Benefit
Funded Status	2015			2014			2015			2014
Net amount recognized in the balance sheet	$	(24,304,926	)	$	(26,164,812	)	$	(793,055	)	$	(2,905,908	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit						Postretirement Benefit
	2015			2014			2015		2014
Net (loss)/gain	$	(32,220,482	)	$	(35,093,871	)	$	1,658,406	$	(630,853	)
Prior service (cost) credit		(376,685	)		(595,270	)		63,731		87,620
	$	(32,597,167	)	$	(35,689,141	)	$	1,722,137	$	(543,233	)

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

	Pension Benefit						Postretirement Benefit
	2015			2014			2015			2014
Balance at beginning of period	$	(35,689,141	)	$	(20,075,506	)	$	(543,233	)	$	(3,544	)
Change due to availability of final actual assets and census data		—			—			(346	)		54,065
Charged to net periodic benefit cost
Prior service cost		218,585			218,585			(23,889	)		(23,888	)
Net loss (gain)		1,928,298			944,130			18,804			—
Liability (gains)/losses
Discount rate		4,121,170			(10,600,944	)		87,748			(445,610	)
Mortality table		—			(2,808,383	)		—			(75,047	)
Asset (gains)/losses deferred		(2,813,796	)		(184,695	)		(52,851	)		(72,378	)
Other		(362,283	)		(3,182,328	)		2,235,904			23,169
Balance at end of period	$	(32,597,167	)	$	(35,689,141	)	$	1,722,137		$	(543,233	)

In 2016, the net periodic pension benefit cost will include $1,837,738 of net loss and $200,568 of prior service cost and the net periodic postretirement benefit cost will include $125,885 of net gain and $23,889 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:

	2015		2014
Discount rate
- Pension plans	4.24% - 4.28%		3.9	%
- Supplemental pension plans	3.53	%	3.9	%
- Postretirement plan	4.23	%	3.9	%
Expected return on plan assets	8.0	%	8.0	%
Rate of compensation increase	3.25	%	3.25	%

At January 2, 2016 and January 3, 2015, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $83,433,339 and $84,714,136, respectively.

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

	2015			2014
Number of plans		6			6
Projected benefit obligation	$	87,427,769		$	90,516,922
Accumulated benefit obligation		83,433,339			84,714,136
Fair value of plan assets		63,122,843			64,352,110
Net amount recognized in accrued benefit liability		(24,304,926	)		(26,164,812	)

Estimated future benefit payments to participants of the Company’s pension plans are $3.4 million in 2016, $3.6 million in 2017, $3.8 million in 2018, $4.1 million in 2019, $4.4 million in 2020 and a total of $26.2 million from 2021 through 2025.

Estimated future benefit payments to participants of the Company’s postretirement plan are $118,000 in 2016, $118,000 in 2017, $117,000 in 2018, $117,000 in 2019, $117,000 in 2020 and a total of $577,000 from 2021 through 2025.

The Company expects to make cash contributions to its qualified pension plans of approximately $3.1 million and to its postretirement plan of approximately $118,000 in 2016.

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. In 2015 we developed each plan’s discount rate 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. Prior to 2015, we used the same process to determine each individual plan’s discount rate, but the average of these rates was used to determine a single rate for all plans.

The fair values of the company’s pension plans assets at January 2, 2016 and January 3, 2015, utilizing the fair value hierarchy discussed in Note 2, follow:

	January 2, 2016
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	236,209	$	—	$	236,209
Equities:
The Eastern Company Common Stock		4,069,088		—		—		4,069,088
Common/collective trust funds
Russell Large Cap Defensive Equity Fund (a)		—		6,685,388		—		6,685,388
Russell Equity II Fund (b)		—		4,456,364		—		4,456,364
Russell Large Cap U.S. Equity Fund (c)		—		5,575,535		—		5,575,535
Russell International Fund with Active Currency (d)		—		7,796,625		—		7,796,625
Russell Emerging Markets Fund (e)		—		3,350,136		—		3,350,136
Fixed Income:
Common/collective trust funds
Russell Fixed Income I Fund (f)		—		8,504,086		—		8,504,086
Target Duration LDI Fixed Income Funds (g)
· Russell 8 Year LDI Fixed Income Fund		—		1,478,701		—		1,478,701
· Russell 10 Year LDI Fixed Income Fund		—		1,840,616		—		1,840,616
· Russell 12 Year LDI Fixed Income Fund		—		2,119,786		—		2,119,786
· Russell 14 Year LDI Fixed Income Fund		—		3,795,220		—		3,795,220
· Russell 16 Year LDI Fixed Income Fund		—		5,615,278		—		5,615,278
STRIPS Fixed Income Funds (h)
· Russell 15 Year STRIPS Fixed Income Fund		—		2,606,554		—		2,606,554
· Russell 10 Year STRIPS Fixed Income Fund		—		1,411,574		—		1,411,574
· Russell 28 to 29 Year STRIPS Fixed Income Fund		—		543,357		—		543,357
Insurance contracts		—		3,038,326		—		3,038,326
Total	$	4,069,088	$	59,053,755	$	—	$	63,122,843

	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
Russell Large Cap Defensive Equity Fund		—		6,936,880		—		6,936,880
Russell Equity II Fund		—		4,632,485		—		4,632,485
Russell Concentrated Equity Fund		—		5,788,864		—		5,788,864
Russell International Fund with Active Currency		—		7,606,489		—		7,606,489
Russell Emerging Markets Fund		—		3,188,672		—		3,188,672
Fixed Income:
Common/collective trust funds
Russell Fixed Income I Fund		—		17,013,171		—		17,013,171
Target Duration LDI Fixed Income Funds
· Russell 6 Year LDI Fixed Income Fund		—		226,826		—		226,826
· Russell 8 Year LDI Fixed Income Fund		—		227,960		—		227,960
· Russell 10 Year LDI Fixed Income Fund		—		343,712		—		343,712
· Russell 12 Year LDI Fixed Income Fund		—		919,538		—		919,538
· Russell 14 Year LDI Fixed Income Fund		—		1,212,739		—		1,212,739
· Russell 16 Year LDI Fixed Income Fund		—		520,522		—		520,522
Russell Long Duration Fixed Income Fund (i)		—		8,112,746		—		8,112,746
Insurance contracts		—		2,946,495		—		2,946,495
Total	$	3,473,938	$	60,878,172	$	—	$	64,352,110

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 Russell Large Cap Defensive Equity Fund is to outperform the Russell 1000® Defensive Index® while managing volatility and maintaining diversification similar to the Index over a full market cycle. The Fund invests in common stocks of large and medium cap U.S. companies, employing a multi-manager approach with advisors using distinct methods to identify medium to large cap U.S. stocks with positive excess return potential. The defensive style of investing emphasizes investments in equities of companies expected to have lower than average stock price volatility, higher financial quality and/or stable business fundamentals.
(b)	The Russell Equity II Fund has an objective to provide a favorable total return primarily through capital appreciation. Aims to outperform the Russell 2500® Index with above-average consistency while managing volatility and maintaining diversification similar to the Index over a full market cycle. The fund invests in common stocks of U.S. small cap companies. It employs a multi-style (growth and market-oriented, value), multi-manager approach. Advisors employ distinct yet complementary styles in their stock selection, focusing on factors such as: undervalued or under-researched companies, special situations, emerging growth, asset plays and turnarounds.
(c)	The investment objective of the Russell Large Cap U.S. Equity Fund (formerly the Russell Concentrated Equity Fund) is to outperform the Russell 1000® Index with above-average consistency over a full market cycle. The fund invests in common stocks of large and medium cap U.S. companies. Employs a multi-style, multi-manager approach whereby portions of the fund are allocated to different money managers who employ distinct styles. The number of advisors and number of stocks (150 – 200) is more concentrated than other Russell multi-style large cap U.S. funds.
(d)	The Russell International Fund with Active Currency seeks to provide long-term growth of Capital. Aims to outperform the Russell Development ex-U.S. Large Cap Index Net while managing volatility and maintaining diversification similar to the index over a full market cycle. The fund invests primarily in the equities of non-U.S. developing markets and currency of global markets. Employs multiple managers with distinct investment styles, which are intended to be complementary. Seeks to capitalize on the stock selection abilities of its active manager. The Fund typically has moderate country and sector weights relative to the index. Also believe active currency management is an attractive strategy with the potential to deliver excess return.
(e)	The Russell Emerging Markets Fund seeks to provide the potential for long-term growth of Capital. Aims to outperform the Russell Emerging Markets Index Net over a full market cycle. The fund invests in equity securities of companies located in, or are economically tied to, emerging market countries. Securities are denominated principally in foreign currencies and are typically held outside the U.S. The Fund employs a multi-style (growth, market-oriented and value) and multi-manager approach whereby portions of the fund are allocated to different money managers who employ distinct styles.
(f)	The Russell Fixed Income I Fund is designed to provide current income and capital appreciation through a variety of diversified strategies. The Fund seeks favorable returns comparable to the broad fixed income market, as measured by the Barclays U.S. Aggregate Bond Index. The fund primarily invests in fixed income securities representing diverse sectors and maturities. Advisors use diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. It is actively managed with multiple advisors employing distinct yet complementary strategies and different technologies to insure prudent diversification over a broad spectrum of investments.
(g)	The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds invest primarily in investment grade corporate bonds that closely match those found in discount curves used to value U.S. pension liabilities. They seek to provide additional incremental return through modest interest rate timing, security selection and tactical use of non-credit sectors. Generally for use in combination with other bond funds to gain additional credit exposure, with the goal of reducing the mismatch between a plan’s assets and liabilities.

(h)

The STRIPS (Separate Trading of Registered Interest and Principal of Securities) Funds seek to provide duration and Treasury exposure by investing in an optimized subset of the STRIPS universe with a similar duration profile as the Barclays U.S. Treasury STRIPS 10-11 year, 16-16 year or 28-29 year Index. These passively managed funds are generally used with other bond funds to add additional duration to the asset portfolio. This will help reduce the mismatch between a plan’s assets and liabilities.

(i)

The Russell Long Duration Fixed Income 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. In January 2015, the Trustee of the plan sold all of the assets of this fund. The proceeds were invested in the LDI Target funds and the STRIPS funds as of the end of 2015.

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 217,018 and 202,562 shares of the common stock of the Company having a market value of $4,069,938 and $3,473,938 at January 2, 2016 and January 3, 2015, respectively. The Salaried Pension Plan purchased 14,456 shares of common stock at a cost of $232,124 during 2015 and 8,938 shares of common stock at a cost of $146,712 in 2014. No shares were sold in either period. Dividends received during 2015 and 2014 on the common stock of the Company were $92,743 and $93,507 respectively.

The fair values of the Company’s postretirement plan assets at January 2, 2016 and January 3, 2015, utilizing the fair value hierarchy discussed in Note 2, follow:

	January 2, 2016
	Level 1		Level 2		Level 3		Total
Fixed Income:
Insurance contracts	$	—	$	—	$	1,188,289	$	1,188,289
Total	$	—	$	—	$	1,188,289	$	1,188,289

	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

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:

	2015			2014
Fair value of Level 3 assets at beginning of year	$	1,149,204		$	1,187,603
Change due to availability of final actual assets and census data		—			(2,451	)
Actual return on plan assets		39,085			22,434
Employer contributions		81,360			19,639
Benefits paid		(81,360	)		(78,021	)
Fair value of Level 3 assets at end of year	$	1,188,289		$	1,149,204

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	$	71,520	$	(57,039	)

Effect on postretirement benefit obligation	$	—	$	—

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 $232,399 in 2015, $186,545 in 2014, and $194,068 in 2013. Beginning in 2015, the Company began making a non-discretionary contribution to the plan for the benefit of all U.S. non-union employees who are not eligible for the Company’s salaried retirement plan. This contribution totaled $51,470 in 2015.