The Framerate / Quality toggle does affect the gameplay when 120hz and VRR is engaged. Per the Digital Foundry video it's basically:
VRR + 120hz + Quality: Same resolution and everything as base game, just unlocked framerate. 60-90FPS
VRR + 120hz + Performance: 1440p, 100-120FPS
120hz + Quality: 1440p, 100-120FPS
120hz + Framerate: 1200p, 120FPS
So in short you get solid 120FPS in graphics mode with VRR off because it's running the exact same settings as performance mode with VRR on. You shouldn't turn off VRR, it's going to help on those instances where it does drop from its target on more demanding conditions.