It fits with the cup towards the outside, away from the bearing. It's loose and there's a gap around the outside & when you remove the axle, it falls out.
There's no seal only the ones on the bearings. As you said "it does not 'seem right" but that's how they designed it.
The same design is used for the TM125,250,400, RM125A,B,C & a lot more.