12. Employee Retirement Plans

Pension benefits

The Company provides noncontributory defined benefit pension plans for certain employees. Plans covering salaried employees generally provide pension benefits that are based on the employee’s average earnings and credited service. Such plans were partially frozen as of December 31, 2011 and subsequently were completely frozen as of December 31, 2018. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Such plans were frozen as of December 31, 2011. 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
	2018		2017

Benefit obligation at beginning of year	$	43,664	$	39,407
Service cost		409		356
Interest cost		1,555		1,613
Actuarial (gain) loss		(3,296)		3,571
Benefits paid		(1,391)		(1,283)
Curtailment		(759)		-
Benefit obligation at end of year		40,182		43,664
Fair value of plan assets at beginning of year		33,903		29,223
Actual return on plan assets		(1,506)		4,294
Employer contributions through December 31		7,047		1,669
Benefits paid		(1,391)		(1,283)
Fair value of plan assets at end of year		38,053		33,903
Funded status at end of year	$	(2,129)	$	(9,761)

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



		2018		2017		2016
Components of net periodic pension cost:
Service cost	$	409	$	356	$	321
Interest cost		1,555		1,613		1,639
Expected return on plan assets		(1,901)		(1,790)		(1,824)
Amortization of net loss		706		723		724
Net periodic pension cost	$	769	$	902	$	860

The accumulated benefit obligation for all pension plans as of December 31, 2018 and 2017, was $40,182 and $42,876, 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
	2018			2017			2016
Discount rates		3.6	%		4.2	%	4.5	%
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
Salaried		5.8			6.5		7.25
Hourly		6.5			6.5		7.25

The discount rate used to determine the benefit obligation at December 31, 2018 was 4.2% for both the hourly and salaried pension plans. Meanwhile the discount rate used to determine the benefit obligation at December 31, 2017 was 3.6% for both the hourly and salaried pension plans.

For 2019, the expected long‑term rate of return on plan assets is 3.6% for the salaried plan and 3.2% for the hourly plan. 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:



2019	$	1,540
2020		1,530
2021		1,560
2022		1,740
2023		1,820
2024-2028		10,920

The Company made required minimum pension funding contributions of $47 and voluntary contributions of $7,000 to the pension plans in 2018 and currently expects to make $0 of required minimum pension funding contributions in 2019 as a result of the $7,000 in voluntary contributions in 2018.

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, 2018 and 2017. The investment policy is reviewed periodically in order to achieve overall objectives in light of current circumstances. In the year ended December 31, 2018, the Company rebalanced its investments to fixed income and cash equivalents in conjunction with the changes in funding status resulting from the $7.0 million voluntary contribution.

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



	Target			2018				Target			2017
Large Cap Equity		5	%	$	-	0	%		34	%	$	2,259	35	%
Mid Cap Equity		0	%		-	0	%		3	%		199	3	%
Small Cap Equity		0	%		-	0	%		1	%		73	1	%
International Equity		2	%		-	0	%		14	%		950	15	%
Emerging Markets Equity		0	%		-	0	%		2	%		128	2	%
Fixed Income and Cash Equivalents		90	%		7,388	99	%		40	%		2,447	38	%
Real Estate		3	%		107	1	%		6	%		382	6	%

Total		100	%	$	7,495	100	%		100	%	$	6,438	100	%

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


	Target			2018				Target			2017
Large Cap Equity		5	%	$	-	0	%		21	%	$	6,111	23	%
Mid Cap Equity		0	%		-	0	%		2	%		542	2	%
Small Cap Equity		0	%		-	0	%		1	%		201	1	%
International Equity		2	%		-	0	%		9	%		2,573	9	%
Emerging Markets Equity		0	%		-	0	%		1	%		348	1	%
Fixed Income and Cash Equivalents		90	%		30,009	98	%		60	%		16,046	58	%
Real Estate		3	%		549	2	%		6	%		1,644	6	%

Total		100	%	$	30,558	100	%		100	%	$	27,465	100	%

Historically, the investment strategy was to build an efficient, well‑diversified portfolio based on a long‑term, strategic outlook of the investment markets. The investment market outlook utilized 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. As a result of the change in funding status in the year ended 2018, the Company rebalanced its investments to minimize market 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, 2018 are as follows:



	Balance as of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Fixed-income holdings	$	37,397	$	—	$	37,397	$	—
Alternative investments		656		—		—		656

Total pension plan assets	$	38,053	$	—	$	37,397	$	656

The fair values of the Company’s pension plan assets as of December 31, 2017 are as follows:



	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Equity holdings	$	13,384	$	—	$	13,384	$	—
Fixed-income holdings		18,493		—		18,493		—
Alternative investments		2,026		—		—		2,026

Total pension plan assets	$	33,903	$	—	$	31,877	$	2,026

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,
		2018		2017
Balance, beginning of year	$	2,026	$	1,748
Deposits		213		100
Actual return on plan assets held at reporting date		136		142
Withdrawals and transfers		(1,719)		36
Balance, end of year	$	656	$	2,026

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
	2018		2017
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	6,949	$	7,333
Service cost		189		205
Interest cost		233		278
Participant contributions		25		25
Changes in actuarial assumptions		(926)		(853)
Benefits paid		(50)		(39)
Projected benefit obligation at end of year	$	6,420	$	6,949
Amounts recognized in the consolidated balance sheets consisted of:
Accrued expenses and other current liabilities	$	180	$	140
Retiree health benefit obligation		6,240		6,809
	$	6,420	$	6,949

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



		2018		2017		2016
Components of net postretirement health benefit cost:
Service cost	$	189	$	205	$	210
Interest cost		233		278	278
Amortization of net gain		(211)		(107)	(127)
Net postretirement healthcare benefit cost (income)	$	211	$	376	$	361

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



	Year Ended December 31
	2018			2017			2016
Discount rate		3.4	%		3.8	%	4.1	%
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 6.8% beginning in 2018 gradually reducing to an ultimate rate of 4.5% in 2027.

**Health Care Cost Trend rate is assumed to be 7.0% beginning in 2017 gradually reducing to an ultimate rate of 4.5% in 2026.

***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.

The discount rate used to determine the benefit obligation at December 31, 2018 and 2017 is 3.8% and 4.1%, respectively. For December 31, 2018, the health care cost trend rate is assumed to be 6.8% beginning in 2018 gradually reducing to an ultimate rate of 4.5% in 2027. For December 31, 2017, the health care cost trend rate is assumed to be 7.0% beginning in 2017 gradually reducing to an ultimate rate of 4.5% in 2026. For December 31, 2016, 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 2025.

A one percentage point change in the healthcare cost trend rate would have the following effect at December 31, 2018:



	1%		1%
	Increase		Decrease
Effect on total service and interest cost	$	48	$	(42)
Effect on postretirement benefit obligation		653		(577)

Amounts included in accumulated other comprehensive loss, net of tax, at December 31, 2018, which have not yet been recognized in net periodic pension or OPEB cost, were net actuarial gain (loss) of ($6,637) and $2,118 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 2019 are ($595) and $88 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 $1,700, $625 and $863 for the years ended December 31, 2018, 2017 and 2016, 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 $1,237, $1,128 and $901 in the years ended December 31, 2018, 2017 and 2016, respectively. 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 merged 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 $542, $526 and $511 for the years ended December 31, 2018, 2017 and 2016, respectively. The amount accrued was $5,243, $4,980 and $3,471 as of December 31, 2018, 2017 and 2016, respectively. Amounts were determined based on the fair value of the liability at December 31, 2018, 2017 and 2016, respectively. The Company holds assets that substantially equivalent to the liability and are intended to fund the liability.