Google told me that it made this change after the company pushed the app out to wide testing around the company; it found that the experience was better when it saved chat history for longer. That history helps Google with things like the app's auto-reply features, which work better the more data is available for Google to analyze.
For the end user, this means that your messages are stored on Google's servers, in the same fashion that Hangouts messages and emails from your Gmail account are. The messages are still encrypted between your phone and Google's servers, and they're stored using encryption that Google can open up so it's accessible to their machine learning processes.
If both you and the other participant in your conversation choose to delete a conversation, though, the messages will be removed from Google's servers. And if you want extra privacy, you can use Allo's incognito mode, though you won't get the benefit of the Google Assistant that sets the app apart from other options. Deleting the app itself from my iPhone also deleted all the content of the conversations I was having -- but again, if my friends didn't delete those chats, they're still out there on Google's servers.
For most users, this probably won't be a deal-breaker -- it's not really any different than how most of Google's many other communication products behave. But there's also no doubt that there's been increased attention given to the privacy and security of your online communications. If that's a concern to you, Allo might not be the best option for you.