It is VERY important to have your draw length correct. It makes a night and day difference in how steady you can hold and not influencing the arrow during the shot process. You wouldn't ever want to change your draw length just to get good peep to sight housing alignment.
If I understand right, from your comment of "stretching back uncomfortably", you are trying to get your head further back from the string so that your peep and sight housing match better? That has to be very uncomfortable and absolutely ruin your chances of having a consistent anchor point. Many people like to draw back and have the string just touch the tip of their nose (may not be possible with a longer draw length and a short axle to axle bow) It is a very common anchor point reference.
I could go into proper form but there are good youtube videos that can show it much better than words. The best thing to remember is make the bow fit you, don't make your body fit the bow.
You have three options to get a better peep to sight housing match. Adjust how far the sight is from the bow's riser, like with a dovetail mount, change the diameter of the peep, or change the diameter of the sight housing (expensive option, would require buying a whole different sight in most cases).
I suspect you read that the sight housing and peep diameter "should" be a match, but that's not the only way. Like MattB says, allow your eye to naturally center the pin and see if that's consistent for you. Before sight housings were round we all just centered the pin within our peep. Worked just fine. Our eyes are very good at centering things.
A 1/4" peep is pretty big, I personally prefer a 3/16" size for a hunting peep.