The option “do not archive items in this folder” means that you don’t want to archive (again) the messages of these folders because they already are “archived” items. I think this setting is fine as it is.
Go to the properties of the “Archived folders” (not a specific archived folder, but the group), and go to the advanced page. You should see there the path and name of your archived folders, which will usually be “archive.pst”.
Hope this helps.