I am using "ARCH_HAND_TEXT_SMALL"

But I embarrassed to say that I need the letters to be 3/32 NOT 3/16.  My arithmetic error.  But, 

I noticed you circled the annotation scale in the bottom right. Frankly I don't understand what this is or does.   The floor plan, my template, is set at 1/8".   I got it from an architectural firm that always does their plans at 1/8".  Is this bad practice?  It is really true that all drawing should be done at 1:1?  

Why does it matter when I set the scale in paper space for what I need?