You most likely are referring to the local jsonl files where claude has your sessions etc stored.
In my enterprise-seated account I see slightly different options available (vs. my personal account) in the Capabilities section:
Search and reference chats
Allow Claude to search for relevant details in past chats.
Generate memory from chat history (Legacy)
Allow Claude to remember relevant context from your chats. Memory includes your entire chat history with Claude.
The first option was defaulted to on, if I recall.Claude code stores memory locally on the device, similar to how a developer stores notes.
Data retention is about storing your raw conversation data.
Capabilities and Privacy settings are used to manage memory and data retention.