Those starting distant options are for where they start with multiple sectors, not within your starting sector. I've never had any success making sectors work in a viable way though.  You get one full sector and one almost empty sector over half the time and that just isn't a viable game start for me.  It isn't fun, they definitely need to work on it more.

I have personally given up on the feature and only play single sector games which is a shame.

Yes in single sector games those options don't do anything at all, I've started 100s' of maps with a civ that sees all capitals and none of them seem to do anything in single sector games.  Empires are just placed randomly, you can't decide where they spawn.  Those settings do have some impact in multiple sector games but it doesn't really work very well imo.

I couldn't find the dev post about it but I think it is by design.  Those settings are about how empires are placed throughout the sectors.  They are not about placement within the individual sectors.

So victory conditions will be disabled if you do it in game.  Just go to the Victory option in the escape menu and deselect them.  Deselecting them during game creation does nothing.