Also a VPN is a good idea if you have to use an unsecured Wi-Fi access point with your laptop or iPhone. I use Witopia. It's well worth the $40/year if you have to use networks without encryption in areas like airports, hotels or coffee shops.

Yes. You are correct in your understanding of how this works, and it is more secure to select "Off" for this option as you will have to manually join any networks that you have not previously joined.

I've found a problem with this though if you ever join a network with a common name like "linksys". Every time you pass a network with that same name (and there are thousands), your iPhone will automatically join that network. I've had this problem while driving down the street (while someone else is driving) and had problems with my internet connection. I've found that the phone automatically joined one of these networks.

... and every other mobile WiFi device. iPhone and iPod touch are not inherently any more insecure, it's just nice to be able to use the word "iPhone" in a headline, as it gets attention.