It turns out that Dev Studio respects this setting only for web services.
For non-web services, you can get this to work by adding an AfterBuild target to the project file:
<Target Name="AfterBuild" DependsOnTargets="AssignTargetPaths;Compile;ResolveKeySource" Inputs="$(MSBuildAllProjects);@(IntermediateAssembly)" Outputs="$(OutputPath)$(_SGenDllName)">
<SGen BuildAssemblyName="$(TargetFileName)" BuildAssemblyPath="$(OutputPath)" References="@(ReferencePath)" ShouldGenerateSerializer="true" UseProxyTypes="false" KeyContainer="$(KeyContainerName)" KeyFile="$(KeyOriginatorFile)" DelaySign="$(DelaySign)" ToolPath="$(SGenToolPath)">
<Output TaskParameter="SerializationAssembly" ItemName="SerializationAssembly" />
</SGen>
</Target>
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