Yes they do. It is also very useful to screen out people you add for games but don't really know. :D

It basically works the same way as LJ's custom friend groups do. For example, my default posts are open to friends and friends of friends "except" for three groups which I have blocked (one being the "gamer" friends).

Just remember to put all of your friends in at least one group! Otherwise they will have the "default" access.