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 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.

Effective for January 1, 2018, as a result of the collective bargaining agreement between the Illinois Lock Company and the Service Employees International Union Local, 1 C.L.C. pension accruals for the covered employees have been frozen. 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 Illinois Lock Plan was considered a significant event pursuant to such standard. As a result, the Company expensed the previously unrecognized Prior Service Cost. The Eastern Company increased the expense by $14,928. The freezing of benefit accruals did not impact the pension benefit obligation. The additional recognition occurred as of the end of the fiscal year; thus, a remeasurement was not necessary.

Effective for September 1, 2017, as a result of the collective bargaining agreement between the Eberhard Manufacturing Company and the International Association of Machinists and Aerospace Workers AFL-CIO District # 54 Local #439, the following changes were made:

The pension for the covered employees has been frozen for any new employees who would have entered the plan after September 1, 2017. 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 partial freezing of benefits under the Eberhard Hourly Union Plan was not considered a significant event pursuant to such standard. The benefit formula multiplier was modified by increasing it by $.50 on September 1, 2017 and by another $.50 on each subsequent anniversary for the lifetime of the contract. The benefit multiplier will equal $45.00 at the end of the current contract (August 31, 2022).

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. 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.

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

	2017			2016			2015
Service cost	$	1,276,608		$	1,977,295		$	3,770,191
Interest cost		3,170,194			3,486,982			3,472,870
Expected return on plan assets		(4,783,531	)		(4,995,858	)		(5,151,654	)
Amortization of prior service cost		178,874			200,568			218,585
Amortization of the net loss		1,231,486			1,704,863			1,928,298
Net periodic benefit cost	$	1,073,631		$	2,373,850		$	4,238,290

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:

	2017			2016			2015
Discount rate
- Pension plans		4.04% - 4.08	%		4.24% - 4.28	%		3.90	%
- Supplemental pension plans		3.03	%		3.53	%		3.90	%
Expected return on plan assets		7.5	%		8.0	%		8.0	%
Rate of compensation increase		0	%		3.25	%		3.25	%

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

	2017			2016			2015
Service cost	$	27,389		$	29,300		$	217,570
Interest cost		80,827			94,872			154,915
Expected return on plan assets		(51,494	)		(47,532	)		(91,936	)
Amortization of prior service cost		(21,444	)		(23,890	)		(23,889	)
Amortization of the net loss		(77,601	)		(93,921	)		18,804
Net periodic benefit cost	$	(42,323	)	$	(41,171	)	$	275,464

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

	2017			2016			2015
Discount rate		4.12	%		4.23	%		3.90	%
Expected return on plan assets		4.0	%		8.0	%		8.0	%

As of December 30, 2017 and December 31, 2016, the status of the Company's pension benefit plans and other postretirement benefit plan was as follows:

	Pension Benefit						Other Postretirement Benefit
	2017			2016			2017			2016
Benefit obligation at beginning of year	$	92,258,937		$	87,427,769		$	2,339,050		$	1,981,344
Change due to availability of final actual assets and census data		—			—			—			317,440
Discount rate		6,200,491			2,359,745			181,691			34,471	)
Service cost		1,276,608			1,977,295			27,389			29,300
Interest cost		3,170,194			3,486,982			80,827			94,872
Actuarial (gain)/loss		(1,495,135	)		2,940,154			(65,601	)		33,022
Benefits paid		(3,385,793	)		(3,398,419	)		(139,946	)		(151,399	)
Plan Amendment		496,899			—			—			—
Additional recognition due to significant event		—			(2,534,589	)		—			—
Benefit obligation at end of year	$	98,522,201		$	92,258,937		$	2,423,410		$	2,339,050

	Pension Benefit						Other Postretirement Benefit
	2017			2016			2017			2016
Fair value of plan assets at beginning of year	$	65,627,499		$	63,122,843		$	1,287,350		$	1,188,289
Actual return on plan assets		9,315,225			4,653,349			103,889			99,061
Employer contributions		541,841			1,249,726			139,946			151,399
Benefits paid		(3,385,793	)		(3,398,419	)		(139,946	)		(151,399	)
Fair value of plan assets at end of year	$	72,098,772		$	65,627,499		$	1,391,239		$	1,287,350

	Pension Benefit								Other Postretirement Benefit
Funded Status	2017				2016				2017				2016
Net amount recognized in the balance sheet		$	(26,423,429	)		$	(26,631,438	)		$	(1,032,171	)		$	(1,051,700	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit								Other Postretirement Benefit
	2017				2016				2017			2016
Net (loss)/gain		$	(32,565,614	)		$	(33,623,438	)		$	1,089,785		$	1,231,081
Prior service (cost) credit			(494,142	)			(176,117	)			18,397			39,841
		$	(33,059,756	)		$	(33,799,555	)		$	1,108,182		$	1,270,922

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

	Pension Benefit						Other Postretirement Benefit
	2017			2016			2017			2016
Balance at beginning of period	$	(33,799,555	)	$	(32,597,167	)	$	1,270,922		$	1,722,137
Change due to availability of final actual assets and census data		---			—			--			(317,440	)
Charged to net periodic benefit cost
Prior service cost		178,874			200,568			(21,444	)		(23,890	)
Net loss (gain)		1,231,486			1,704,863			(77,601	)		(93,921	)
Liability (gains)/losses
Discount rate		(6,200,491	)		(2,359,745	)		(181,691	)		(34,471	)
Asset (gains)/losses deferred		5,978,071			(4,325,232	)		52,395			51,529
Additional recognition due to plan amendment		(496,899	)		2,534,589			-—			—
Other		48,758			1,042,569			65,601			(33,022	)
Balance at end of period	$	(33,059,756	)	$	(33,799,555	)	$	1,108,182		$	1,270,922

In 2017, the net periodic pension benefit cost included $1,118,370 of net loss and $120,968 of prior service cost and the net periodic other postretirement benefit cost included $65,591 of net gain and $5,072 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:

			2017			2016
Discount rate
	-	Pension plans		3.54% - 3.57	%		4.04% - 4.08	%
	-	Supplemental pension plans		3.10	%		3.03	%
	-	Other postretirement plan		3.60	%		4.12	%

At December 30, 2017 and December 31, 2016, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $98,522,201 and $92,258,937, respectively.

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

	2017			2016
Number of plans		6			6
Projected benefit obligation	$	98,522,201		$	92,258,937
Accumulated benefit obligation		98,522,201			92,258,937
Fair value of plan assets		72,098,722			65,627,499
Net amount recognized in accrued benefit liability		(26,423,429	)		(26,631,438	)

Estimated future benefit payments to participants of the Company's pension plans are $3.8 million in 2018, $4.1 million in 2019, $4.3 million in 2020, $4.6 million in 2021, $4.8 million in 2022 and a total of $26.8 million from 2023 through 2027.

Estimated future benefit payments to participants of the Company's other postretirement plan are $105,000 in 2018, $106,000 in 2019, $107,000 in 2020, $109,000 in 2021, $110,000 in 2022 and a total of $569,000 from 2023 through 2027.

The Company expects to make cash contributions to its qualified pension plans of approximately $510,000 and to its other postretirement plan of approximately $105,000 in 2018.

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 2017, as in 2016, 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.

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 30, 2017 and December 31, 2016, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 30, 2017
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	278,016	$	—	$	278,016
Equities:
The Eastern Company Common Stock		5,675,021				—		5,675,021
Common/collective trust funds
Russell Multi Asset Core Plus Fund (a)		—		31,642,837		—		31,642,837
Fixed Income:
Common/collective trust funds
Target Duration LDI Fixed Income Funds (b)
· Russell 8 Year LDI Fixed Income Fund		—		6,033,648		—		6,033,648
· Russell 14 Year LDI Fixed Income Fund		—		18,083,206		—		18,083,206
STRIPS Fixed Income Funds (c)
· Russell 15 Year STRIPS Fixed Income Fund		—		1,905,068		—		1,905,068
· Russell 10 Year STRIPS Fixed Income Fund		—		3,570,427		—		3,570,427
· Russell 28 to 29 Year STRIPS Fixed Income Fund		—		2,144,581		—		2,144,581
Insurance contracts		—		2,765,967		—		2,765,967
Total	$	5,675,021	$	66,423,750	$	—	$	72,098,771

	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		—		8,178,635		—		8,178,635
RITC Emerging Markets Fund		—		3,373,089		—		3,373,089
Fixed Income:
Common/collective trust funds
RITC Fixed Income I Fund		—		8,700,175		—		8,700,175
Target Duration LDI Fixed Income Funds
· 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
· 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

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) Multi-Asset Core Plus Fund seeks to provide long-term growth of capital over a market cycle by offering a diversified portfolio of funds and separate accounts investing in global stock, return seeking fixed income, commodities, global real estate and opportunistic investments. They hold a dynamic mix of underlying Russell Investments funds and/or separate accounts. Russell Investments is a strong proponent of disciplined strategic asset allocation and rebalancing strategies, and believes that unstable movements in the market have the potential to create opportunities. By identifying short-term mispricing, and making small tactical adjustments to the Multi-Asset Core Plus Fund, they believe there is potential to enhance returns while continuing to manage risks.

(b)

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.

(c)

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 $5,675,021 and $4,535,676 at December 30, 2017 and December 31, 2016, respectively. No shares were purchased in 2017 or 2016 nor were and shares sold in either period. Dividends received during 2017 and 2016 on the common stock of the Company were $95,488 and $95,488 respectively.

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.

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. The 401(k) Plan Amendment increased the non-discretionary safe harbor contribution to 3%, and changed the eligibility to all non-union U.S. employees.

The Company made contributions to the plan as follows:

	2017		2016		2015
Regular matching contributions	$	465,671	$	328,144	$	232,399
Transitional credit contributions		385,578		231,847		—
Non-discretionary contributions		355,747		51,470		—
Total contributions made for the period	$	1,206,996	$	611,461	$	232,399

At December 30, 2017, the Company had accrued $502,618 for the non-discretionary contribution this amount was expensed in 2017 and was contributed to the plan in January 2018. 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 and is included in the 2017 figure. The non-discretionary contribution for $51,470 was expensed in Fiscal 2015 and contributed to the Plan in Fiscal 216.