RETIREMENT BENEFIT PLANS

12 Months Ended

Jan. 01, 2022

RETIREMENT BENEFIT PLANS

RETIREMENT BENEFIT PLANS

11. RETIREMENT BENEFIT PLANS

The Company has non-contributory defined benefit pension plans covering some 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 for the fiscal year indicated were as follows:

	2021			2020
Service cost	$	1,087,333		$	1,065,739
Interest cost		2,017,015			2,856,569
Expected return on plan assets		(5,794,694	)		(5,461,044	)
Amortization of prior service cost		99,380			99,380
Amortization of the net loss		1,730,150			1,300,134
Net periodic benefit cost	$	(860,816	)	$	(139,222	)

Service costs are reported in the cost of products sold and the other components of net periodic benefit costs are reported in other income in the consolidated statements of income.

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

	2021			2020
Discount rate
- Pension plans	2.40% - 2.48		%	3.18% - 3.23		%
- Supplemental pension plans		1.49	%		2.61	%
Expected return on plan assets		7.5	%		7.5	%
Rate of compensation increase		0	%		0	%

11. RETIREMENT BENEFIT PLANS (continued)

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

	2021			2020
Service cost	$	54,505		$	43,418
Interest cost		39,369			46,668
Expected return on plan assets		(25,681	)		(22,355	)
Amortization of prior service cost		-			(8,253	)
Amortization of the net loss		(12,374	)		(25,509	)
Net periodic benefit cost	$	55,819		$	33,969

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

	2021			2020
Discount rate		2.66	%		3.35	%
Expected return on plan assets		4.0	%		4.0	%

As of January 1, 2022, and January 2, 2021, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:

	Pension Benefit						Other Postretirement Benefit
	2021			2020			2021			2020
Benefit obligation at beginning of year	$	111,549,725		$	102,991,053		$	1,827,169		$	1,566,019
Change in discount rate		(5,316,621	)		10,606,739			(96,343	)		218,000
Service cost		1,087,333			1,065,739			54,505			43,418
Interest cost		2,017,015			2,856,569			39,369			46,668
Plan Amendment		-			-			36,388			-
Actuarial (gain)/loss		2,340,743			(1,786,595	)		110,462			32,282
Significant Event		-			-			(218,103	)		-
Benefits paid		(4,257,857	)		(4,183,750	)		(28,865	)		(14,654	)
Benefit obligation at end of year	$	107,420,338		$	111,549,725		$	1,724,582		$	1,827,169

	2021			2020			2021			2020
Fair value of plan assets at beginning of year	$	78,361,102		$	74,359,558		$	642,030		$	558,873
Actual return on plan assets		4,369,247			5,568,671			16,066			83,157
Employer contributions		2,342,462			2,616,623			45,243			33,343
Significant Event		-			-			(218,103	)		-
Benefits paid		(4,257,855	)		(4,183,750	)		(45,243	)		(33,343	)
Fair value of plan assets at end of year	$	80,814,956		$	78,361,102		$	439,993		$	642,030

	Pension Benefit						Other Postretirement Benefit
Funded Status	2021			2020			2021			2020
Net amount recognized in the balance sheet	$	(26,605,382	)	$	(33,188,623	)	$	(1,284,589	)	$	(1,185,139	)

11. RETIREMENT BENEFIT PLANS (continued)

Amounts recognized in accumulated other comprehensive income consist of:
	Pension Benefit						Other Postretirement Benefit
	2021			2020			2021		2020
Net (loss)/gain	$	(40,447,026	)	$	(43,727,607	)	$	241,621	$	349,276
Prior service (cost) credit		(66,252	)		(165,632	)		-		-
	$	(40,513,278	)	$	(43,893,239	)	$	241,621	$	349,276

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

	Pension Benefit						Other Postretirement Benefit
	2021			2020			2021			2020
Balance at beginning of period	$	(43,893,239	)	$	(36,580,267	)	$	349,276		$	507,954
Change due to availability of final actual assets and census data		-			-			-			-
Charged to net periodic benefit cost
Prior service cost		99,380			99,380			-			(8,253	)
Net loss (gain)		1,730,150			1,300,134			(12,374	)		(25,509	)
Liability (gains)/losses
Discount rate		5,316,621			(10,606,709	)		96,343			(218,000	)
Asset (gains)/losses deferred		(771,444	)		6,202,764			(9,615	)		60,802
Plan Amendments		-			-			(36,388	)		-
Significant Event		-			-			(35,159	)		-
Other		(2,994,746	)		(4,308,541	)		(110,462	)		32,282
Balance at end of period	$	(40,513,278	)	$	(43,893,239	)	$	241,621		$	349,276

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:

	2021			2020
Discount rate
- Pension plans	2.75% - 2.81		%	2.40% - 2.48		%
- Supplemental pension plans		2.08	%		1.49	%
- Other postretirement plan		2.93	%		2.66	%

At January 1, 2022 and January 2, 2021, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $107,420,338 and $111,549,725, respectively.  During 2021, the pension benefit obligation decreased between 3.5% to 4.8% due to the decrease in the discount rates from 2.40%-2.48% to 2.75%-2.81%.

11. RETIREMENT BENEFIT PLANS (continued)

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

	2021			2020
Number of plans		5			5
Projected benefit obligation	$	107,420,338		$	111,549,725
Accumulated benefit obligation		107,420,338			111,549,725
Fair value of plan assets		80,814,956			78,361,102
Net amount recognized in accrued benefit liability	$	(26,605,382	)	$	(33,188,623	)

Estimated future benefit payments to participants of the Company’s pension plans are $4.8 million in 2022, $5.0 million in 2023, $5.2 million in 2024, $5.4 million in 2025, $5.5 million in 2026 and a total of $29.2 million from 2027 through 2031.

Estimated future benefit payments to participants of the Company’s other postretirement plan are $50,000 in 2022, $50,000 in 2023, $50,000 in 2024, $52,000 in 2025, $54,000 in 2026 and a total of $303,000 from 2027 through 2031.

The Company expects to make cash contributions to its qualified pension plans of approximately $300,000 and to its other postretirement plan of approximately $50,000 in 2022.

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 2021, as in 2020, 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 FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. 

11. RETIREMENT BENEFIT PLANS (continued)

The fair values of the company’s pension plans assets at January 1, 2022 and January 2, 2021, utilizing the fair value hierarchy discussed in Note 4 – Accounting Policies – Fair Value of Financial Instruments, follow:

	January 1, 2022
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	356,173	$	—	$	356,173
Equities:
The Eastern Company Common Stock		5,460,173				—		5,460,173
Common/collective trust funds
Russell Multi Asset Core Plus Fund (a)		—		36,142,837		—		36,142,837
Fixed Income:
Common/collective trust funds
Target Duration LDI Fixed Income Funds (b)
·     Russell 25 Year LDI Fixed Income Fund		—		4,320,207		—		4,320,207
·     Russell 14 Year LDI Fixed Income Fund		—		26,430,482		—		26,430,482
STRIPS Fixed Income Funds (c)
·     Russell 15 to 20 Year STRIPS Fixed Income Fund		—		3,264,328		—		3,264,328
·     Russell 10 to 15 Year STRIPS Fixed Income Fund		—		4,840,756		—		4,840,756
Total	$	5,460,173	$	75,354,783	$	—	$	80,814,956

11. RETIREMENT BENEFIT PLANS (continued)

	January 2, 2021
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	347,538	$	—	$	347,538
Equities:
The Eastern Company Common Stock		5,230,134				—		5,230,134
Common/collective trust funds
Russell Multi Asset Core Plus Fund (a)		—		35,139,260		—		35,139,260
Fixed Income:
Common/collective trust funds
Target Duration LDI Fixed Income Funds (b)
·     Russell 25 Year LDI Fixed Income Fund		—		2,506,615		—		2,506,615
·     Russell 14 Year LDI Fixed Income Fund		—		26,452,904		—		26,452,904
STRIPS Fixed Income Funds (c)
·     Russell 15 to 20 Year STRIPS Fixed Income Fund		—		3,500,718		—		3,500,718
·     Russell 10 to 15 Year STRIPS Fixed Income Fund		—		5,183,933		—		5,183,933
Total	$	5,230,134	$	73,130,968	$	—	$	78,361,102

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.

11. RETIREMENT BENEFIT PLANS (continued)

(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 $5,460,173 and $5,230,134 on January 1, 2022 and January 2, 2021, respectively. No shares were purchased in 2021 or 2020 nor were any shares sold in either period.  Dividends received during 2021 and 2020 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.

11. RETIREMENT BENEFIT PLANS (continued)

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:

	2021		2020
Regular matching contributions	$	553,619	$	535,910
Transitional credit contributions		138,604		163,464
Non-discretionary contributions		392,865		398,908
Total contributions made for the period	$	1,085,088	$	1,098,282

As of January 1, 2022, the Company had accrued $323,082 for the non-discretionary safe harbor contribution this amount was expensed in 2021 and was contributed to the plan in January 2022. As of January 2, 2021, the Company had accrued $332,092 for the non-discretionary safe harbor contribution. This amount was contributed to the Plan in January 2021 and was expensed in 2020.