The split ring is solid metal. It feels/appears to be of the hardened variety.
I agree, it seems like a ridiculous way to seal the piston. If it's not fully compressed it will always leak a bit, and as the cylinder wall wears it will leak more and more.

I'm wondering if they might make an oversized piston/ring and maybe I have to bore the cylinder out so it's smooth again. It's also possible that the cylinder wall is a pressed in sleeve, but I haven't looked at it closely enough to tell.

Either way, it would require removing the transmission from the vehicle to fix.

If neither of the above are options, I'd say this tranny has had it. No rebuild will fix this. I may have to start looking for a junk yard tranny which is is better shape .

P.S.
Interestingly the exploded parts view image of the 722.118 tranny I got from the MB part dept. looks very different from what I pulled out of my B2 (which matches the ATSG 722.1-722.2 manual). Maybe MB changed the servo assembly. I'll check with them tomorrow morning.

David