Auto Delegation for small Pools Ideas

The recent ISO events have highlighted some of the worries of small single pool operators and concerns regarding the concentration of stake.

If the protocol allowed users to select their desired pool but ring-fenced 10% of the stake for auto-distribution you could improve the stake pool retention rate (i.e reduced retired pools). With 33B ADA in circulation with 72% staked if only 10% of stake was distributed to around the bottom 2700 Pools those pools would have around 800k ADA delegated. This amount of ADA would mint a block every 1-2 epochs for small pools thereby covering their operation costs and preventing early retirement. 5% would probably even be sufficient to mint 1 block per month to cover operation costs.

Are there major flaws in this logic or unforeseen complications for PoS Security?

Your premise, that small pools are desired, may not be correct. The protocol currently desires 500 pools. If small pools are forced to retire, the protocol is being efficient and effective at making that happen.