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Yes , there are website builders that allow for free custom domain name connection. You can either purchase a new domain via the system or use your existing domain. The only drawback of the free account is a quite noticeable advert that will be placed on your website. You can get rid of it by upgrading your account.
Yes the fee to transfer has to be paid even when transferring to another account within 1and1. You also cannot simply push a domain as you can at most other Registrars. If you have more than one package under the same Customer ID, then you can move the domain to a different package without paying the fee UNLESS the domain was one you got for free.
Some of the web hosting services offered by 1&1 include shared web hosting, Linux hosting, Microsoft hosting, dedicated hosting, and green web hosting. Their most popular web hosting service is their shared web hosting package.
1and1 is also a good domain registrar. But their renew charges are too high compare to Goadddy and Name cheap.