Well, consider a few things:
1. $399 might make them line up with the cheapest PS5 in theory, but even in the US, the Digital Edition Slim Family PS5, the only one in production, has an MSRP of $449.99, not $399.99, Nintendo would still have the cheapest flagship console on the market with the added value of being a hybrid, while Sony charges an extra $199.99 minimum just for the official remote play device. It also has a physical Game Card slot, surely. Now compare the $699.98 price tag of a Portal + Disk Drive PS5, and $399.99 starts to look generous.
2. Regional pricing, PS5 Slim Family with a Disk Drive costs upwards of €549.99 in Europe, that's over $600 depending on the day. €399.99 Vs €549.99 is a huge gap, and when you say, add on the cost of the Portal and convert to USD, that's a difference of over $320 at today's exchange rates.
3. Because of regional pricing, $400 is NOT untried, Nintendo Switch OLED Model being over 400 of the local dollar in various countries, and most notably, launching at OVER 400 USD equivalent in the Eurozone, which consists mostly of countries with LOWER average incomes than the USA, and it still sold extremely well here.
4. $350 for the new system would make the OLED Model much more difficult to price after launch. Does it go all the way down to $249.99? That would be a shock, that could eat into profits, I don't know if I can see that happening. $399.99 isn't a huge upset coming from $349.99, the first number is still the same, and that matters in the minds of consumers. Meanwhile, OLED Model can drop "only" $50 and have a not too drastic but very differentiating price cut to $299.99.