The headset was NIB from a nearby shop. I'm hoping this problem will simply go away after I tighten everything down with the spacer and stem addition (I'm still need a brake hanger I want to throw in there so the final setup is pending). I was just shocked to see so much play in the lower retainer/lower washer/lower seal, as the picture indicated.

This was the first new headset I've installed and I'm used to maintaining my others where that lower retainer creates a nice, solid seal with the lower cup. I tried another thing this morning: without the fork in the head tube, I just pressed the lower bearing cage down as hard as I could into the crown race. When I did that, it seemed to tighten up the lower retainer seal (which is that "plastic washer" made to fill that gap... it sits between the crown race and bearing cage) and will likely eliminate the problem.

I guess I just have to bear down on the thing once I'm ready to finalize the setup. I was just trying to figure out if it was normal for that lower seal to be so loose-- I was afraid I did something wrong during the installation. I still don't think it is supposed to be that loose... but I think I can make it work by the end. Maybe that's a small price I pay for cheap stuff.

Thanks.