"Domain destination" refers to the location where a domain's website files are located. Usually this is a directory (folder) in the web space that is provided with your hosting package. A domain's destination can also be forwarded to another website so that when someone accesses your domain, traffic is forwarded to another website instead.
By default, all domains registered or transferred to 1&1 will point to the root directory or root of your webspace. The root of your webspace is simply the location on your web hosting server where you are able to store all of your website files. If you have more than one domain in the same package, it is suggested to created subfolders in the root of your webspace - one subfolder for each domain. You can then edit each domain's destination so that each points to its own subfolder and this will keep each website's files separate from the others.