The District of Columbia Retirement Board -- which controls about $500 million in pension funds for police, firefighters, judges and teachers -- has voted to move trusteeship of those funds from Washington's American Security Bank to State Street Bank in Boston.

American Security, the District's second biggest bank, has been master trustee for the retirement funds since 1980, when it took over from the National Bank of Washington. Before that the U.S. Treasury managed D.C. retirement funds.

The retirement board made the decision to switch the account after a six-month search conducted by a consulting firm, Callan & Associates. Reportedly, more than a dozen financial firms were invited to bid. The finalists were State Street, American Security, National Bank of Washington and Bankers Trust Co., a big New York bank.

Sources close to the retirement board said that State Street's computer capability was the primary reason that the 10-member board voted Tuesday to move the business away from a District bank. Board members, however, apparently were unhappy that American Security, through a clerical error, had allowed about $5 million in short-term funds to lie uninvested for several weeks. The bank, however, made the fund whole.

Repeated phone calls to Retirement Board Chairman Arthur M. Reynolds were not returned. Bonnie Cohen, chairman of the retirement board's investment committee, declined to discuss the reasons that persuaded the board to make the switch and referred a reporter to Reynolds and Callan & Associates executives, who also did not return a reporter's calls.

She said, however, that the board also voted to have as many services as possible remain in the hands of local institutions -- including perhaps disbursement of benefits and short-term cash management.

The actual investment of pension fund assets is parceled out to a number of different funds managers who specialize in stock, bond, real estate and other investments.

The master trustee is responsible for custody of securities owned by the fund -- even though investment decisions are made by the various managers. The master trustee is responsible for all record-keeping and reporting and usually controls the short-term investment of funds that have not been assigned to a particular manager. The short-term management usually represents current contributions to the funds.

Washington bankers said they were surprised that the retirement board voted to give master trusteeship of the account to a non-Washington bank. But, according to one D.C. bank executive, there "is no doubt that State Street is the Cadillac of the industry."

State Street is one of the biggest and serves as trustee not only for municipal pension funds but also for private industry and other institutional investors.

Walter R. Fatzinger, executive vice president of American Security, said he was disappointed with the retirement board's decision because American Security valued the business with city government. He said the loss of the account would not have a major impact on the bank's revenue or profits.

Banking sources estimated that the retirement board funds would generate about $250,000 a year in fees for a master trustee -- although the funds are expected to grow about $100 million a year and the fees, based on the assets in the funds, would grow commensurately.

American Security is the biggest bank trustee in the area. It manages about $3.5 billion in assets and has custody of another $3.5 billion. Fatzinger said the D.C. retirement account was among its five biggest. Except for the $30 million to $50 million of short-term investments American Security controlled, most of the board's assets were in the bank's custodial accounts.

Fatzinger acknowledged that the bank's error in failing to invest $5 million of short-term money did not help its case when the retirement board was studying whether to change master trustees. But he said the bank paid to the fund the money $5 million would have earned.

Investment committee Chairman Cohen said the bank's clerical error was not an overriding factor in the board's decision.