its not quite as described above but close, it goes like this:
When it is set to ON, and if there are no known networks (networks you joined before), the iPod will ask you if you want to join any available network if there is one within your range.
When set to OFF, the iPod will still automatically join the network you are used to, but if your network is not available, it will not pop up a message asking if you want to join some other network that is within your range.
Is it confusing? lol, the thing is, I leave it OFF, because it doesn't pop up some message asking if I want to join this or that network if I'm away from my default router all the time.