A retention policy is something that determines how long a message can stay in a folder. The folder maybe an Inbox, Sent or an Outbox. In case one does not Implement a retention policy then the size of the Inbox would continue to Increase with the Incoming messages.
With a retention policy one can set a time on how long the message can remain in a folder after which it can be deleted or moved into an Archive folder.
A retention policy consists of retention tags which helps in implementing the policy.