Yes it does that, based on whatever you put into the menu admin
"of top-level pages and their children"
No it doesn't do that, why would it? If you wanted that, then you'd
use wp_list_pages. It wouldn't make any sense to try and translate
that into some sort of dynamic menu system... 99% of users would have
no use for it as their menus aren't even big enough to worry about
needing a dynamic query.
"If the new menu system isn't as capable as the standard ways of doing
things, then why would a theme author ever implement it?"
Because it's much MORE capable. I don't need to explain to my users
"create some categories and some pages and they'll show up in your
nav, then go to this other page and select the Page and Category ID's
to exclude from this menu, you can find out the ID by going to
the...... hey, what are you doing? Wake up! What do you mean you want
them in a different order, no we can't do that. Oh you want a custom
link in your nav? Too bad."
Instead I'll say "Go to the menus section, and create your navigation
menu with whatever pages, categories or links that you want and drag
+drop to arrange them."