So how does this work?

It is very important. This diameter keeps the transmission input centered properly in the back of the crankshaft. it could be opend up by a machine shop, but you will beed to check its cocentricity with the back of the crank after and adjust it with offset dowels (available from chrysler) I believe the procedure is in the FSM's. This should be checked regardless. other options are installing a smaller input bearing retainer on the transmission, or turning yours down.