Yep thats how the program works mate, mine is same using ipod nano 1st generation, if you create 5 playlists on your ipod you can then select them on your head unit by choosing cd 1-6
Number 6 is always your whole ipod played in random shuffled order and 1-5 are your chosen playlists!
Also it doesn't support charging on anything newer than ipod nano 3rd generation