After selecting Next you will be taken to a menu where you can decide if you want to use Shadow passwords, MD5 passwords, LDAP Authentication, or Kerberos 5.
Shadow passwords only means that the passwords will be stored in the /etc/shadow file instead of the /etc/passwd file. This is good because password crackers will have a slightly more difficult time getting the passwords to run a cracking program against.
MD5 passwords are longer. Usually you can only have 8 characters in a password, but with MD5 the passwords can be up to 256 chatacters long. With out MD5 these passwords would all be the same:
abcdefgh1 abcdefghijklmn abcdefgh987654321 abcdefghABCDEFGH
LDAP and Kerberos are both server related options. LDAP servers provide passwords and directory space. Kerberos servers give tickets that allow you to authenticate once to a server, then continue logging into other Kerberos machines without reauthenticating.
The authentication menu can also be started by running authconfig from the shell.