This keeps the rollers in place on the outside next to the snap ring in the race.
The Iron Sportster mainshaft is a triumph of engineering. The general design has sustained from 1952 to 1984. There were teething problems in the early K-model, but they were all cured by 1957 with the introduction of the Sportster.
If you forget to put this in, you could seize the rear wheel at speed. Use Dr. Dick's trick-- put the tranny in without the rollers, then set the rollers, this washer and the snap ring from the outside.