11. Employee Retirement Plans

Pension benefits

The Company provides noncontributory defined benefit pension plans for most employees. Plans covering salaried employees generally provide pension benefits that are based on the employee’s average earnings and credited service. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company’s funding policy for the plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that the Company may determine to be appropriate.

The reconciliation of the beginning and ending balances of the fair value of plan assets, funded status of plans, and amounts recognized in the consolidated balance sheets consisted of the following:



	December 31
	2016		2015

Benefit obligation at beginning of year	$	37,217	$	38,362
Service cost		321		257
Interest cost		1,639		1,489
Actuarial (gain) loss		1,469		(1,662)
Benefits paid		(1,239)		(1,229)
Benefit obligation at end of year		39,407		37,217
Fair value of plan assets at beginning of year		26,378		26,046
Actual return (loss) on plan assets		2,373		(214)
Employer contributions through December 31		1,711		1,775
Benefits paid		(1,239)		(1,229)
Fair value of plan assets at end of year		29,223		26,378
	$	(10,184)	$	(10,839)

The components of net periodic pension cost consisted of the following for the years ended December 31,



		2016		2015		2014
Components of net periodic pension cost:
Service cost	$	321	$	257	$	216
Interest cost		1,639		1,489		1,496
Expected return on plan assets		(1,824)		(1,630)		(1,631)
Amortization of net loss		724		1,021		203
Net periodic pension cost	$	860	$	1,137	$	284

The accumulated benefit obligation for all pension plans as of December 31, 2016 and 2015, was $38,799 and $36,749, respectively.

In accordance with its adoption of ASC 715‑20, the Company uses December 31 as its measurement date for all periods presented. Assumptions used in determining net periodic pension cost for the plans consisted of the following:



	Year ended December 31
	2016			2015			2014
Discount rates		4.5	%		3.9% - 4.0	%	4.8% - 4.9	%
Rates of increase in compensation levels:
Salaried		3.5			3.5		3.5
Hourly		N/A			N/A		N/A
Expected long-term rate of return on assets		7.25			7.25		7.25

The discount rate used to determine the benefit obligation at December 31, 2016 was 4.2% for both the hourly and salaried pension plans. Meanwhile the discount rate used to determine the benefit obligation at December 31, 2015 was 4.5% for the both the hourly and salaried pension plans.

For 2017, the expected long‑term rate of return on plan assets is 6.50%. To determine the long‑term rate of return assumption for plan assets, the Company studies historical markets and preserves the long‑term historical relationships between equities and fixed‑income securities consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. The Company evaluates current market factors such as inflation and interest rates before it determines long‑term capital market assumptions and reviews peer data and historical returns to check for reasonableness and appropriateness.

The expected benefit payments under the pension plans are as follows:



2017	$	1,400
2018		1,430
2019		1,410
2020		1,480
2021		1,530
2022-2026		9,560

The Company made required minimum pension funding contributions of $411 and voluntary contributions of $1,300 to the pension plans in 2016 and currently expects to make $216 of required minimum pension funding contributions in 2017.

The Company maintains target allocation percentages among various asset classes based on an investment policy established for the pension plans, which is designed to achieve long‑term objectives of return, while mitigating downside risk and considering expected cash flows. The current weighted‑average target asset allocations are reflective of actual investments at December 31, 2016 and 2015. The investment policy is reviewed periodically in order to achieve overall objectives in light of current circumstances.

The Company’s weighted‑average asset allocation and actual allocation for the qualified pension plans by asset category at December 31 is as follows:



	Target			2016				2015
Large Cap Equity		36	%	$	10,435	36	%	$	8,819	34	%
Mid Cap Equity		3	%		929	3	%		774	3	%
Small Cap Equity		1	%		349	1	%		283	1	%
International Equity		12	%		3,479	12	%		2,633	10	%
Emerging Markets Equity		2	%		462	2	%		640	2	%
Fixed Income and Cash Equivalents		40	%		11,821	40	%		10,554	40	%
Real Estate		6	%		1,748	6	%		2,675	10	%

Total		100	%	$	29,223	100	%	$	26,378	100	%

The investment strategy is to build an efficient, well‑diversified portfolio based on a long‑term, strategic outlook of the investment markets. The investment market outlook utilizes both historical‑based and forward‑looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the needs of the plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to help maximize the plan’s return while providing multiple layers of diversification to help minimize risk.

The following table presents the fair values of the plan assets related to the Company’s pension plans within the fair value hierarchy as defined in Note 2.

The fair values of the Company’s pension plan assets as of December 31, 2016 are as follows:



	Balance as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Equity holdings	$	15,654	$	—	$	15,654	$	—
Fixed-income holdings		11,821		—		11,821		—
Alternative investments		1,748		—		—		1,748

Total pension plan assets	$	29,223	$	—	$	27,475	$	1,748

The fair values of the Company’s pension plan assets as of December 31, 2015 are as follows:



	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Equity holdings	$	14,460	$	—	$	14,460	$	—
Fixed-income holdings		10,554		—		10,554		—
Alternative investments		1,364		—		—		1,364

Total pension plan assets	$	26,378	$	—	$	25,014	$	1,364

Level 2 investments are based on quoted prices for similar assets in markets that are not active while Level 3 investments are comprised of a real estate fund for which the fair value is determined by taking the appraised values of the properties on hand plus other assets and subtracting mortgage loans and other liabilities.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3):



	December 31,
		2016		2015
Balance, beginning of year	$	1,364	$	1,316
Deposits		101		89
Actual return on plan assets held at reporting date		138		173
Withdrawals		145		(214)
Balance, end of year	$	1,748	$	1,364

Postretirement benefits

The Company provides postretirement healthcare benefits for certain employee groups. The postretirement healthcare plans are contributory and contain certain other cost‑sharing features such as deductibles and coinsurance. The plans are unfunded. Employees do not vest until they retire from active employment with the Company and have at least twelve years of service. These benefits can be amended or terminated at anytime and are subject to the same ongoing changes as the Company’s healthcare benefits for employees with respect to deductible, co‑insurance and participant contributions.

Effective January 1, 2004, the postretirement healthcare benefits were extended to all active employees of the Company as of December 31, 2003. The period of coverage was reduced and the retiree contribution percentage was increased in order to keep the cost of the plan equivalent to the previous plan design.

Maximum coverage under the plan is limited to ten years. All benefits terminate upon the death of the retiree. Employees who began working for the Company after December 31, 2003, are not eligible for postretirement healthcare benefits.

The reconciliation of the beginning and ending balances of the projected benefit obligation for the Company consisted of the following:



	December 31
	2016		2015
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	6,896	$	7,044
Service cost		210		229
Interest cost		278		256
Participant contributions		38		45
Changes in actuarial assumptions		53		(508)
Benefits paid		(142)		(170)
Projected benefit obligation at end of year	$	7,333	$	6,896
Amounts recognized in the consolidated balance sheets consisted of:
Accrued expenses and other current liabilities	$	140	$	240
Retiree health benefit obligation		7,193		6,656
	$	7,333	$	6,896

The components of postretirement healthcare benefit cost consisted of the following for the year ended December 31,



		2016		2015		2014
Components of net postretirement health benefit cost:
Service cost	$	210	$	229	$	159
Interest cost		278		256	213
Amortization of net gain		(127)		(69)	(398)
Net postretirement healthcare benefit cost (income)	$	361	$	416	$	(26)

The assumed discount and healthcare cost trend rates are summarized as follows:



	Year Ended December 31
	2016			2015			2014
Discount rate		4.1	%		3.7	%	4.5	%
Immediate healthcare cost trend rate		*			**		***
Ultimate healthcare cost trend rate		4.5			4.5		4.5
Assumed annual reduction in trend rate		*			**		***
Participation		60			60		60

* Health Care Cost Trend rate is assumed to be 7.0% beginning in 2016 gradually reducing to an ultimate rate of 4.5% in 2025.

**Health Care Cost Trend rate is assumed to be 7.0% beginning in 2015 gradually reducing to an ultimate rate of 4.5% in 2024.

***Health Care Cost Trend rate is assumed to be 7.0% and 6.0% for Pre-65 participants and Post – 65 participants, respectively, beginning in 2014 gradually reducing to an ultimate rate of 4.5% in 2023.

The discount rate used to determine the benefit obligation at December 31, 2016 and 2015 is 3.7% and 4.5%, respectively. For December 31, 2016, the health care cost trend rate is assumed to be 7.0% beginning in 2016 gradually reducing to an ultimate rate of 4.5% in 2025. For December 31, 2015, the health care cost trend rate is assumed to be 7.0% beginning in 2015 gradually reducing to an ultimate rate of 4.5% in 2024. For December 31, 2014, the health care cost trend rate is assumed to be 7.0% for participants under 65 and 6.0% for those over 65 beginning in 2014 gradually reducing to an ultimate rate of 4.5% in 2023 for both participants under 65 and over 65.

A one percentage point change in the healthcare cost trend rate would have the following effect at December 31, 2016:



	1%		1%
	Increase		Decrease
Effect on total service and interest cost	$	62	$	(54)
Effect on postretirement benefit obligation		822		(721)

Amounts included in other comprehensive loss, net of tax, at December 31, 2016, which have not yet been recognized in net periodic pension or OPEB cost, were net actuarial gain (loss) of ($6,414) and $937 for the pension plans and postretirement healthcare benefit plans, respectively. The estimated actuarial gain (loss) for the defined benefit plans that will be amortized from accumulated other comprehensive loss into net periodic pension or OPEB cost during 2017 are ($723) and $107 for the pension plans and postretirement healthcare benefit plans, respectively.

Defined contribution plan

The Company has a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code and provides substantially all employees an opportunity to accumulate personal funds for their retirement. Contributions are made on a before‑tax basis to the plan and are invested, at the employees’ direction, among a variety of investment alternatives including, commencing January 1, 2013, a Company common stock fund designated as an employee stock ownership plan.

As determined by the provisions of the plan, the Company matches a portion of the employees’ basic voluntary contributions. The Company matching contributions to the plan were approximately $863, $377 and $255 for the years ended December 31, 2016, 2015 and 2014, respectively. Beginning January 1, 2012, the Company amended its defined contribution plan to permit non‑discretionary employer contributions. The Company made non‑discretionary employer contributions of $901, $1,264 and $1,021 in the years ended December 31, 2016, 2015 and 2014, respectively. The Company additionally made contributions in the year ended December 31, 2015 of $299 into a separate Henderson defined contribution plan. The Company merged the plan into the Douglas Dynamics, L.L.C. 401(k) plan in 2016. The Company additionally made contributions in the year ended December 31, 2016 of $119 into a separate Dejana defined contribution plan. The Company intends to merge the Dejana plan into the Douglas Dynamics, L.L.C. 401(k) plan in 2018.

Non‑qualified plan

The Company also maintains a supplemental non‑qualified plan for certain officers and other key employees. Expense for this plan was $511 and $496 for the years ended December 31, 2016 and 2015, respectively. The amount accrued was $3,471 and $2,482 as of December 31, 2016 and 2015, respectively. Amounts were determined based on the fair value of the liability at December 31, 2016 and 2015, respectively.