When you find a fairy, you have the option to release it. What's the point of it? I can't find an achievement for it or anything, and I can't find an explanation anywhere, except that they somehow help Melody?

There's an achievement for it.

"Free all the Fairies!

Free 1,000 Fairies to continue their good work for Melody!"

Also the achievement reward for releasing 1000 fairies is the hidden Luminaire site theme, if that interests you.

Huh, for some reason it doesn't show up when I search it. Oh well.. thanks for your help, guys! =)

(btw Karen I love the background on your avatar!)

Thank you! And good luck with the fairies! :)

It's in the Seasonal > Luminaire section. It may be also helpful to know that if you're looking for an achievement by using the search input box, it only takes one word at a time (i.e. searching Free All the Fairies won't work, but a search for Faeries (or any one word in the name of the achievement) will).