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Defined Contribution

Hedge fund created the ultimate, tax-free IRA account for employees

Renaissance Technologies’ Jim Simons

Renaissance Technologies, the giant hedge fund founded by billionaire Jim Simons, looks like it has created the premier, tax-free retirement account for its employees.

A deft maneuver back in 2012 enabled employees to invest in RenTech's Medallion Fund, one of the most successful hedge funds of all time, via individual retirement accounts.

A recent filing with the Labor Department provides a glimpse into the wealth Medallion has generated within RenTech employees' IRAs. As of late 2017, the IRA assets exceeded $660 million, representing an eight-fold jump in roughly five years.

The gains stemmed from Renaissance's ability to capitalize on a key rule change involving Roth IRAs.

'A slam-dunk'

By paying the tax upfront through a Roth, Renaissance employees could then fully reap Medallion's astronomical returns tax-free. This was particularly valuable in Medallion's case because the fund's profits are often generated through short-term trading and thus subject to top tax rates.

"It was a slam-dunk investment for all the employees," said Josh Lichtenstein, a partner in tax and benefits at Ropes & Gray.

Jonathan Gasthalter, a spokesman for Renaissance, declined to comment.

The strategy designed by East Setauket, N.Y..-based Renaissance, had several moving parts.

The firm initially terminated its 401(k) plan for employees in 2010, a step that allowed them to roll the savings into traditional IRAs. Employees then took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. The following year, Renaissance applied for clearance from the U.S. Labor Department for employees to invest the accounts in Medallion, which the agency granted and made effective in January 2012.

In addition to the tax differences, Roth IRAs also don't require workers to take distributions in retirement and can be passed along to heirs.

Fund limits

The Medallion fund has been restricted mainly to RenTech employees since 2005 as the firm took steps to keep its size around $10 billion. The fund has averaged annualized returns approaching 80% before fees, but such gains can slump when it gets too big. Even employees face annual investment limits, and Medallion also typically distributes its profits every six months instead of reinvesting the gains.

In addition to the tax and survivor benefits, Renaissance employees who invest in Medallion through their IRAs are spared fees that the fund imposes on its taxable accounts. The fund charges a 5% management fee and a performance fee equaling as much as 44% of gains.

Big advantage

The $87 million that employees initially allotted to the company IRA plan in 2012 swelled to $664 million by the end of 2017, including $574 million in Medallion, the filings show. In turn, the IRA money — held by about 250 employees — grew to more than 4% of Medallion's gross assets from about 1% five years earlier.