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.

On April 5, 2016, the Board of Directors passed a resolution freezing the benefits of The Salaried Employees Retirement Plan of The Eastern Company (the “Salaried Plan”) effective as of May 31, 2016. Under ASC 715, the Company is required to remeasure plan assets and obligations during an interim period whenever a significant event occurs that results in a material change in the net periodic pension cost. The determination of significance is based on judgment and consideration of events and circumstances affecting the pension costs. After consulting with our actuary the freezing of benefits under the Salaried Plan was considered a significant event pursuant to such standard.

The Company used April 30, 2016 as the remeasurement date. Assumptions used to determine the projected benefits obligations for the Salaried Plan for the measurement date indicated follows:

	Measurement Date
	April 30, 2016			December 31, 2015
Discount rate		3.69	%		4.24	%
Expected rate of return		8.0	%		8.0	%
Rate of compensation increase		--			3.25	%

As a result of the remeasurement, pension benefit obligations increased $3,022,291. The major components of this change are as follows:

	April 30, 2016
Discount rate	$	4,383,159
Service cost		770,361
Interest cost		818,565
Actuarial loss		611,693
Benefits paid		(1,026,898	)
Additional recognition due to significant event		(2,534,589	)
Net increase in pension benefit obligation	$	3,022,291

In accordance with ASC 715, the Company performed curtailment accounting procedures in relation to the freezing of benefits of the Salaried Plan. The Company did not recognize any gain or loss related to the freeze of benefits accrued under the Salaried Plan, since there were no unrecognized prior service costs for the Salaried Plan, and the calculated $2.5 million gain from the reduction of accumulated plan benefits was more than offset by other actuarial losses in Other Comprehensive Income, there were no curtailment accounting adjustments required.

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

	2016			2015			2014
Service cost	$	1,977,295		$	3,770,191		$	2,837,134
Interest cost		3,486,982			3,472,870			3,365,194
Expected return on plan assets		(4,995,858	)		(5,151,654	)		(4,810,524	)
Amortization of prior service cost		200,568			218,585			218,585
Amortization of the net loss		1,704,863			1,928,298			944,130
Net periodic benefit cost	$	2,373,850		$	4,238,290		$	2,554,519

As a result of the freezing of the benefits of the Salaried Plan, 2016 pension expense was reduced by $2,447,000.

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

	2016			2015			2014
Discount rate
- Pension plans		4.24% - 4.28	%		3.90	%		4.80	%
- Supplemental pension plans		3.53	%		3.90	%		4.80	%
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 other postretirement benefit plan were as follows:

	2016			2015			2014
Service cost	$	29,300		$	217,570		$	173,902
Interest cost		94,872			154,915			157,481
Expected return on plan assets		(47,532	)		(91,936	)		(22,434	)
Amortization of prior service cost		(23,890	)		(23,889	)		(23,888	)
Amortization of the net loss		(93,921	)		18,804			(72,378	)
Net periodic benefit cost	$	(41,171	)	$	275,464		$	212,683

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

	2016			2015			2014
Discount rate		4.23	%		3.90	%		4.8	%
Expected return on plan assets		8.0	%		8.0	%		8.0	%

As of December 31, 2016 and January 2, 2016, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:

	Pension Benefit						Other Postretirement Benefit
	2016			2015			2016			2015
Benefit obligation at beginning of year	$	87,427,769		$	90,516,922		$	1,981,344		$	4,055,112
Change due to availability of final actual assets and census data		—			—			317,440			346
Discount rate		2,359,745			(4,121,170	)		34,471			(87,748	)
Service cost		1,977,295			3,770,191			29,300			217,570
Interest cost		3,486,982			3,472,870			94,872			154,915
Actuarial (gain)/loss		2,940,154			(3,316,552	)		33,022			(2,235,904	)
Benefits paid		(3,398,419	)		(2,894,492	)		(151,399	)		(122,947	)
Additional recognition due to significant event		(2,534,589	)		—			—			—
Benefit obligation at end of year	$	92,258,937		$	87,427,769		$	2,339,050		$	1,981,344

	Pension Benefit						Other Postretirement Benefit
	2016			2015			2016			2015
Fair value of plan assets at beginning of year	$	63,122,843		$	64,352,110		$	1,188,289		$	1,149,204
Actual return on plan assets		4,653,349			(1,340,977	)		99,061			39,085
Employer contributions		1,249,726			3,006,202			151,399			122,947
Benefits paid		(3,398,419	)		(2,894,492	)		(151,399	)		(122,947	)
Fair value of plan assets at end of year	$	65,627,499		$	63,122,843		$	1,287,350		$	1,188,289

	Pension Benefit								Other Postretirement Benefit
Funded Status	2016				2015				2016				2015
Net amount recognized in the balance sheet		$	(26,631,438	)		$	(24,304,926	)		$	(1,051,700	)		$	(793,055	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit								Other Postretirement Benefit
	2016				2015				2016			2015
Net (loss)/gain		$	(33,623,438	)		$	(32,220,482	)		$	1,231,081		$	1,658,406
Prior service (cost) credit			(176,117	)			(376,685	)			39,841			63,731
		$	(33,799,555	)		$	(32,597,167	)		$	1,270,922		$	1,722,137

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

	Pension Benefit						Other Postretirement Benefit
	2016			2015			2016			2015
Balance at beginning of period	$	(32,597,167	)	$	(35,689,141	)	$	1,722,137		$	(543,233	)
Change due to availability of final actual assets and census data		—			—			(317,440	)		(346	)
Charged to net periodic benefit cost
Prior service cost		200,568			218,585			(23,890	)		(23,889	)
Net loss (gain)		1,704,863			1,928,298			(93,921	)		18,804
Liability (gains)/losses
Discount rate		(2,359,745	)		4,121,170			(34,471	)		87,748
Asset (gains)/losses deferred		(4,325,232	)		(2,813,796	)		51,529			(52,851	)
Additional recognition due to significant event		2,534,589			—			—			—
Other		1,042,569			(362,283	)		(33,022	)		2,235,904
Balance at end of period	$	(33,799,555	)	$	(32,597,167	)	$	1,270,922		$	1,722,137

In 2017, the net periodic pension benefit cost will include $1,231,484 of net loss and $145,748 of prior service cost and the net periodic other postretirement benefit cost will include $93,921 of net gain and $23,890 of prior service credit.

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

			2016			2015
Discount rate
	-	Pension plans		4.04% - 4.08	%		4.24% - 4.28	%
	-	Supplemental pension plans		3.03	%		3.53	%
	-	Other postretirement plan		4.12	%		4.23	%

At December 31, 2016 and January 2, 2016, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $92,258,937 and $83,433,339, respectively.

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

	2015			2015
Number of plans		6			6
Projected benefit obligation	$	92,258,937		$	87,427,769
Accumulated benefit obligation		92,258,937			83,433,339
Fair value of plan assets		65,627,499			63,122,843
Net amount recognized in accrued benefit liability		(26,631,438	)		(24,304,926	)

Estimated future benefit payments to participants of the Company’s pension plans are $3.8 million in 2017, $4.0 million in 2018, $4.2 million in 2019, $4.5 million in 2020, $4.7 million in 2021 and a total of $26.2 million from 2022 through 2026.

Estimated future benefit payments to participants of the Company’s other postretirement plan are $103,000 in 2017, $105,000 in 2018, $108,000 in 2019, $111,000 in 2020, $113,000 in 2021 and a total of $597,000 from 2022 through 2026.

The Company expects to make cash contributions to its qualified pension plans of approximately $700,000 and to its other postretirement plan of approximately $103,000 in 2017.

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 2016, as 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.

Effective for the Fiscal 2017 expense, the Company is changing the method used to measure Service Cost and Interest Cost for pension and other postretirement benefits for our plans. Previously, we measured interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations. For 2017, interest costs will be measured by applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation (i.e., the Spot rate Approach). The new method provides a more precise measurement of interest costs by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve; the measurement of our pension and other postretirement benefit obligations is not affected. We have accounted for this change as a change in accounting estimate, which is applied prospectively. Consequently, combined 2017 pension expense for the Company’s pension plans and other postretirement plan under the Spot Rate approach is approximately $985,000, which is a $541,000 reduction when compared to the prior approach.

During 2016, as a result of a legal separation of the Russell Indexes from Russell Investments into different companies with different ownership, the name of our Trustee changed from Russell Trust Company to Russell Investment Trust Company (“RITC”).

The fair values of the company’s pension plans assets at December 31, 2016 and January 2, 2016, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	276,129	$	—	$	276,129
Equities:
The Eastern Company Common Stock		4,535,676		—		—		4,535,676
Common/collective trust funds
RITC Large Cap Defensive Equity Fund (a)		—		7,131,589		—		7,131,589
RITC Equity II Fund (b)		—		4,875,234		—		4,875,234
RITC Large Cap U.S. Equity Fund (c)		—		5,984,636		—		5,984,636
RITC International Fund with Active Currency (d)		—		8,178,635		—		8,178,635
RITC Emerging Markets Fund (e)		—		3,373,089		—		3,373,089
FixedIncome:
Common/collective trust funds
RITC Fixed Income I Fund (f)		—		8,700,175		—		8,700,175
Target Duration LDI Fixed Income Funds (g)
· RITC 8 Year LDI Fixed Income Fund		—		1,499,390		—		1,499,390
· RITC 10 Year LDI Fixed Income Fund		—		1,851,317		—		1,851,317
· RITC 12 Year LDI Fixed Income Fund		—		2,122,411		—		2,122,411
· RITC 14 Year LDI Fixed Income Fund		—		3,790,209		—		3,790,209
· RITC 16 Year LDI Fixed Income Fund		—		5,650,440		—		5,650,440
STRIPS Fixed Income Funds (h)
· RITC 15 Year STRIPS Fixed Income Fund		—		2,504,395		—		2,504,395
· RITC 10 Year STRIPS Fixed Income Fund		—		1,407,518		—		1,407,518
· RITC 28 to 29 Year STRIPS Fixed Income Fund		—		464,106		—		464,106
Insurance contracts		—		3,282,552		—		3,282,552
Total	$	4,535,676	$	61,091,825	$	—	$	65,627,501

	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		—		6,685,388		—		6,685,388
Russell Equity II Fund		—		4,456,364		—		4,456,364
Russell Large Cap U.S. Equity Fund		—		5,575,535		—		5,575,535
Russell International Fund with Active Currency		—		7,796,625		—		7,796,625
Russell Emerging Markets Fund		—		3,350,136		—		3,350,136
Fixed Income:
Common/collective trust funds
Russell Fixed Income I Fund		—		8,504,086		—		8,504,086
Target Duration LDI Fixed Income Funds
· 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
· 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

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 RITC (formerly 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 RITC 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 RITC Large Cap U.S. 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 RITC 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 RITC 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 RITC 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.

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 shares of the common stock of the Company having a market value of $ $4,535,676 and $4,069,938 at December 31, 2016 and January 2, 2016, respectively. The Salaried Pension Plan purchased 14,456 shares of common stock at a cost of $232,124 during 2015. No shares were purchased in 2016 nor were and shares sold in either period. Dividends received during 2016 and 2015 on the common stock of the Company were $95,488 and $92,743 respectively.

The fair values of the Company’s other postretirement plan assets at December 31, 2016 and January 2, 2016, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 31, 2016
	Level 1			Level 2			Level 3			Total
Fixed Income:
Insurance contracts		$	—		$	—		$	1,287,350		$	1,287,350
Total		$	—		$	—		$	1,287,350		$	1,287,350

	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

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 and is stated at contract value. An analysis of the Level 3 asset of the Company’s other postretirement plan is as follows:

	2016			2015
Fair value of Level 3 assets at beginning of year	$	1,188,289		$	1,149,204
Change due to availability of final actual assets and census data		—			—
Actual return on plan assets		99,061			39,085
Employer contributions		92,898			81,360
Benefits paid		(92,898	)		(81,360	)
Fair value of Level 3 assets at end of year	$	1,287,350		$	1,188,289

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

For measurement purposes relating to the other 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 no effect on the other postretirement benefit plan.

U.S. salaried and non-union hourly 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. This 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.

In December 2015, the Company approved a 50% match on the first 4% of employee contributions. The Company amended the Eastern Company Savings and Investment Plan (“401(k) Plan Amendment”) effective June 1, 2016. The 401(k) Plan Amendment increased this match to 50% of the first 6% of contributions for the remainder of Fiscal 2016. The 401(k) Plan Amendment also provided for an additional non-discretionary contribution (the “transitional credit”) for certain non-union U.S. employees who were eligible to participate in the Salaried Plan. The amount of this non-discretionary contribution ranges from 0% to 4% of wages, based on the age of the individual on June 1, 2016. Also in December 2015, the Company approved a non-discretionary profit sharing contribution of 2.5% for the benefit of all non-union U.S. employees who were not eligible for the Company’s Salaried Plan. The 401(k) Plan Amendment increased the non-discretionary contribution to 3%, and changed the eligibility to all non-union U.S. employees.

The Company made contributions to the plan as follows:

	2016		2015		2014
Regular matching contributions	$	328,144	$	232,399	$	186,545
Transitional credit contributions		231,847		---		---
Non-discretionary contributions		51,470		---		---
Total contributions made for the period	$	611,461	$	232,399	$	186,545

The non-discretionary contribution for $51,470 was expensed in Fiscal 2015 and contributed to the Plan in Fiscal 2016. At December 31, 2016, the Company had accrued $307,568 for the non-discretionary contribution. This amount was contributed to the Plan in January 2017.