I'm thinking of doing an archive and install for various reasons and I've never done it before. So I was wondering, how smooth is it and what kind of things does it archive?
It's pretty smooth. It moves your old system to a "Previous System" folder where you can get anything you might need. There is also an option to preserve user and network settings, which should automatically import just about everything you might need into the new installation. More info is available here.
Yes, everything in your user home folder (which includes your preferences) is preserved if you select the preservation option. A few third-party apps may not work correctly after an Archive and Install and may need to be reinstalled, but the vast majority of them should be just fine.