It saves every post and comment on its own server, and filters it there. If you're viewing text through lemmy.ml it will not have the N word in it. Apparently fuck is not strong enough, hence my doubt in my immediate reply to my own comment.
edit: I assume if a user on lemmy.ml comments a slur on a lemmy.world instance it will also federate only the censored version, but I'm not sure about that.
lemmy.ml is run by the devs, one of whom is dessalines. He talks about it in general for example in this issue, and again in general in Lemmy's ideal Code of Conduct here (I say ideal because it's what they want, but instances are free to do whatever they want to, at risk of defederation)
I'm sure there are lots of other places they talk about this, but they seem to see it as an integral part of Lemmy, so perhaps there is no specific announcement post. You can join a different instance and you will see a lot less of removed.