Note 11: Retirement and Welfare Plans

Voluntary 401(k) retirement plans are offered to eligible employees within certain U.S. operating units. For most operating units, we make matching contributions based on specific formulas. We also make supplemental contributions to this plan for eligible employees based on achievement of operating performance targets.

A performance compensation retirement plan (“PCRP”) is maintained for eligible highly compensated employees. The company contributions to this plan are based on achievement of performance targets. As of April 28, 2018, and April 29, 2017, we had $0.2 million and $0.1 million, respectively, of obligations for this plan included in other current liabilities and $9.5 million and $8.3 million, respectively, included in other long-term liabilities.

We also maintain an executive deferred compensation plan for eligible highly compensated employees. An element of this plan allows contributions for eligible highly compensated employees. As of April 28, 2018, and April 29, 2017, we had $23.2 million and $20.3 million, respectively, of obligations for this plan included in other long-term liabilities. We had life insurance contracts related to this plan and the PCRP at April 28, 2018, and at April 29, 2017, with cash surrender values of $31.6 million and $27.8 million, respectively, which are included in other long-term assets. Mutual funds related to this plan are considered trading securities and are included in other current assets. This plan had $0.1 million in mutual funds at April 28, 2018, and less than $0.1 million in mutual funds at April 29, 2017.

We maintain a non-qualified defined benefit retirement plan for certain former salaried employees. Included in other long-term liabilities were plan obligations of $15.5 million and $16.7 million at April 28, 2018, and April 29, 2017, respectively, which represented the unfunded projected benefit obligation of this plan. During fiscal 2018 and fiscal 2017, the total cost recognized for this plan was $0.8 million and $0.9 million, respectively, which primarily related to interest cost. The actuarial loss recognized in accumulated other comprehensive loss was $0.2 million and the benefit payments during the year were $1.1 million for both fiscal 2018 and fiscal 2017. Benefit payments are scheduled to be approximately $1.1 million annually for the next ten years. The discount rate used to determine the obligations under this plan as of the end of fiscal 2018 and fiscal 2017 was 4.1% and 3.9%, respectively. This plan is not funded and is excluded from the obligation charts and disclosures that follow. We hold available-for-sale marketable securities to fund future obligations of this plan in a Rabbi trust (see Notes 7 and 19 for additional information on these investments). We are not required to fund the non-qualified defined benefit retirement plan in fiscal 2019; however, we have the discretion to make contributions to the Rabbi trust.

We also maintain a defined benefit pension plan for eligible factory hourly employees at our La-Z-Boy operating unit. This plan is closed to new participants, but active participants continue to earn service credit. The measurement dates for the pension plan assets and benefit obligations were April 28, 2018, and April 29, 2017, in fiscal 2018 and fiscal 2017, respectively.

The changes in plan assets and benefit obligations were recognized in accumulated other comprehensive loss as follows (pre-tax) (for the fiscal years ended):

(Amounts in thousands)	4/28/2018			4/29/2017
Beginning of year net actuarial loss	$	36,397		$	36,850
Net current year actuarial (gain) loss	(2,546		)	2,605
Amortization of actuarial loss	(3,120		)	(3,058		)

End of year net actuarial loss	$	30,731		$	36,397

In fiscal 2019, we expect to amortize $2.6 million of unrecognized actuarial losses as a component of pension expense.

The combined net periodic pension cost and retirement costs for retirement plans were as follows (for the fiscal years ended):

	(52 weeks)			(52 weeks)			(53 weeks)
(Amounts in thousands)	4/28/2018			4/29/2017			4/30/2016
Service cost	$	1,316		$	1,278		$	1,358
Interest cost	4,587			4,681			4,938
Expected return on plan assets	(4,818		)	(4,978		)	(4,997		)
Net amortization and deferral	3,120			3,058			3,001

Net periodic pension cost (hourly plan)	4,205			4,039			4,300
401(k)*	7,093			7,124			6,657
PCRP*	1,347			1,488			3,088
Other*	360			51			318

Total retirement costs (excluding non-qualified defined benefit retirement plan)	$	13,005		$	12,702		$	14,363

*Not determined by an actuary

The funded status of the defined benefit pension plan for eligible factory hourly employees was as follows:

(Amounts in thousands)	4/28/2018			4/29/2017
Change in benefit obligation
Benefit obligation at beginning of year	$	114,185		$	116,371
Service cost	1,316			1,278
Interest cost	4,587			4,681
Actuarial (gain) loss	(5,154		)	14
Benefits paid	(5,694		)	(7,728		)
Administrative expenses	(455		)	(431		)

Benefit obligation at end of year	108,785			114,185

Change in plan assets
Fair value of plan assets at beginning of year	109,012			112,484
Actual return on plan assets	2,211			2,387
Employer contributions	2,000			2,300
Benefits paid	(5,694		)	(7,728		)
Administrative expenses	(455		)	(431		)

Fair value of plan assets at end of year	107,074			109,012


Funded status	$	(1,711	)	$	(5,173	)

Amounts included on the consolidated balance sheet related to the defined benefit pension plan for eligible factory hourly employees consist of:

(Amounts in thousands)		4/28/2018			4/29/2017
Other long-term liabilities		$	(1,711	)	$	(5,173	)

The actuarial assumptions for the defined benefit pension plan for eligible factory hourly employees were as follows (for the fiscal years ended):

	4/28/2018		4/29/2017		4/30/2016
Discount rate used to determine benefit obligations	4.2	%	4.1	%	4.1	%
Discount rate used to determine net benefit cost	4.1	%	4.1	%	4.2	%
Long-term rate of return	4.5	%	4.5	%	4.3	%

Consistent with prior years, the discount rate is calculated by matching a pool of high quality bond payments to the plan’s expected future benefit payments as determined by our actuary. The long-term rate of return was determined based on the average rate of earnings expected on the funds invested or to be invested to provide the benefits of these plans. This included considering the trust’s asset allocation, investment strategy, and the expected returns likely to be earned over the life of the plans. This is based on our goal of earning the highest rate of return while maintaining acceptable levels of risk. We strive to have assets within the plan that are diversified so that unexpected or adverse results from one asset class will not have a significant negative impact on the entire portfolio.

Our investment objective is to minimize the volatility of the value of our pension assets relative to pension liabilities and to ensure assets are sufficient to pay plan benefits by matching the characteristics of our assets relative to our liabilities. At the end of fiscal 2018, over 85% of the plan’s assets were invested in fixed rate investments with a duration that approximates the duration of its liabilities, and the remainder of the assets was invested in equity investments.

The investment strategy and policy for the pension plan reflects a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset-liability matching and asset diversification. The fixed income target asset allocation matches the bond-like and long-dated nature of the pension liabilities. Assets are broadly diversified within all asset classes to achieve adequate risk-adjusted returns while reducing the sensitivity of the pension plan funding status to market interest rates and equity return volatility, and maintaining liquidity sufficient to meet our defined benefit pension plan obligations.

Investments are reviewed at least quarterly and rebalanced as needed. The overall expected long-term rate of return is determined by using long-term historical returns for equity and debt securities in proportion to their weight in the investment portfolio.

The following table presents the fair value of the assets in our defined benefit pension plan for eligible factory hourly employees at April 28, 2018, and April 29, 2017. The various levels of the fair value hierarchy are described in Note 19.

Fiscal 2018

(Amounts in thousands)	Level 1 (a)		Level 2 (a)		Level 3
Cash and equivalents	$	57	$	3,272	$	—
Equity funds	1,449		119		—
Debt funds	—		92,839		—

Total	$	1,506	$	96,230	$	—

(a)There were no transfers between Level 1 and Level 2 during fiscal 2018.

Fiscal 2017

(Amounts in thousands)	Level 1 (b)		Level 2 (b)		Level 3
Cash and equivalents	$	44	$	3,730	$	—
Equity funds	1,517		181		—
Debt funds	—		93,949		—

Total	$	1,561	$	97,860	$	—

(b)There were no transfers between Level 1 and Level 2 during fiscal 2017.

Level 1 retirement plan assets include U.S. currency held by a designated trustee and equity funds of common and preferred securities issued by U.S. and non-U.S. corporations. These equity funds are traded actively on exchanges and price quotes for these shares are readily available.

Cash and equivalents of commingled funds generally valued using observable market data are categorized as Level 2 assets. Equity funds categorized as Level 2 include foreign issued equities that are valued using a bid evaluation. Debt funds categorized as Level 2 consist of corporate fixed income securities issued by U.S. and non-U.S. corporations and fixed income securities issued directly by the U.S. Treasury or by government-sponsored enterprises which are valued using a bid evaluation process with bid data provided by independent pricing sources using observable market data.

We hold common trust funds composed of shares or units in open ended funds with active issuances and redemptions. The value of these funds is determined based on the net asset value of the funds, the underlying assets of which are publicly traded on exchanges. In accordance with recently issued accounting standards, we no longer include these investments in our asset leveling using the fair value hierarchy. The fair value of the investments measured using net asset value at April 28, 2018 and April 29, 2017 was $9.3 million and $9.6 million, respectively.

Our funding policy is to contribute to our defined benefit pension plan amounts sufficient to meet the minimum funding requirement as defined by employee benefit and tax laws, plus additional amounts which we determine to be appropriate. During both fiscal 2018 and fiscal 2017, we voluntarily contributed $2.0 million and $2.3 million, respectively, to our defined benefit pension plan. We currently expect to voluntarily contribute approximately $7 million to our defined benefit pension plan during fiscal 2019.

The expected benefit payments by our defined benefit pension plan for eligible factory hourly employees for each of the next five fiscal years and for periods thereafter are presented in the following table:

(Amounts in thousands)	Benefit Payments
2019	$	6,620
2020	6,723
2021	6,830
2022	6,926
2023	6,997
2024 to 2028	35,077

	$	69,173