The function of the switch varies from guitar to guitar. On some it will split humbuckers, on Teles it switches between having the two pickups in parallel and in series, on Strats I think it lets you have all three pickups on at once.
It's basically just the usual wiring mods that people put on their guitars except Fender have designed a knob with the switch built in.
MXR Phase 45 -> Digitech Hot Rod -> Digitech Whammy4 -> Lovetone Doppelganger -> AKAI Headrush -> EHX Holy Grail -> Marshall MG 30DFX
Fender MIM Standard Stratocaster
Squier Jazz Bass
Westfield SR383 Acoustic
Ibanez 12-String Jumbo
And here it is Geeked for those with short attention spans: