FireMan has the best reply - i'll add a bit...
The dash switch will operate:
1) transfer case
2) Pulse vacuum hublock system
With the hubs in "Auto" or "Lock", you are able to shift the transfer case between 2WD and 4WD during normal driving (without wheels already spinning-out).
For 4Lo - you must be in park or neutral, foot on the brake and not moving - to get in and out.
The switch on the hubs allows for freewheeling in "Auto" if you are in two-wheel drive - or manually locked in the "Lock" position. Many folks just leave them locked for the winter to anable seamless angagement / disengagement.
You will be fine running with the hubs in lock on any road - however, you may notice some u-joint binding at full lock, since the spindle is turning.
When you leave the hubs in "Auto", and select 4Hi, a signal is sent to the 4WD module, which engages the transfer case, then the light on the dash lights. Another signal is also sent to the Pulse Vacuum Hub Solenoid. A vaccum pulse is then sent from the vacuum reservoir (you have a vacuum pump and reservoir on the passenger side above the wheel well (diesel)) to the hubs to engage them. A diaphragm in the hub will pull the gears together and they engage similar to a click type pen - a push to engage and a push to disengage. - So along those lines,, when you go back to 2Hi, a short pulse is sent to disengage the gears in teh hub to allow freewheeling.
There are inherent problems with the vacuum hub system - vacuum leaks. Symptoms of a vacuum leak are that the vents will revert to defrost for about 30-40 seconds. Since the vents run ont eh same vacuum system, they go to defrost as a safety - so you can see...
A good tip for your tranny is that when backing a heavy load or moving through a field at low speeds, disconnect the vacuum solenoid and put the truck in 4Low - this will reduce the stress on the tranny clutches - reverse is especially susceptable to overheating when backing - so 4Low can be a saver. This will engage 4Low in the transfer case, but not egange the hubs for easier maneuvering. There is a modification you can do for an in-cab switch to ever-ride the vacuum solenoid.
More information can be found on thedieselstop.com
Congrats on the "new" truck
-Flywheel