State Street Bank and Trust Co. has retained its master trust custody contract with Calpers by offering to cut its fees by more than 40%.

A $100 billion account, California Public Employees' Retirement System is considered one of the plums of the global custody business. The discounted fee structure that it secured from State Street is likely force other custodians to lower their fees, too.

When Boston-based State Street won a three-year contract for Calpers back in 1992 - at the time a $68 billion account - the bank ruffled competitors' feathers by offering fees 50% lower than anyone else's. By 1993, average custodial fees had dropped 30% to 50% by industry estimates. Calpers then extended the original contract by a year.

This time, Calpers did not bother to request proposals from other custodians, because State Street agreed to scrap a schedule that entailed raising fees incrementally as assets under custody grew.

"Just because their assets grow, doesn't mean it would cost us more," said James J. Darr, a State Street executive vice president.

Instead, State Street will raise fees when the pension adds portfolio managers. The bank is one of Calpers' investment managers.

The new contract, which runs from July 1 until the middle of 1999, calls for $13.28 million in custody fees, a savings of $10.4 million compared with the previous schedule.

Observers say the price cut will not hurt the bank's profitability.

"I'm sure $10 million was peanuts compared to what that account brings in to overall revenue," said George A. Bicher III, an analyst who covers State Street for Alex. Brown & Sons.

Successful custodians sell several services - such as securities lending, portfolio accounting, and foreign exchange - in a bundled fashion to large accounts.

Mr. Bicher added that the new fee structure allows State Street to continue diversifying revenues beyond the thin margins of pure custody.

"While public funds have to disclose fees, there are a lot of ancillary services that make it very profitable overall," he said.

On a net basis, the pension sponsor should save money on the new contract, a Calpers spokesman said. He added that the process of requesting proposals from other custodians was undesirable.

"It would be costly and disruptive if we had to align with another bank," the spokesman said.

State Street also did not want to see the contract go out to public bidding.

"There is always a risk that we'd end up getting a lower fee than we're getting now" under the negotiated schedule, Mr. Darr said.

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