the way password encryption works is that the plain text password is sent as part of the form post to the server. once at the server, the server converts the plain text password to the encrypted password.
you can include the plain text password in your email by using the binding for the password form element.
for storing the password in the database, you need to use the DataAssist insert or update behaviors, the dreamweaver insert ands update behaviors wont have the encryption formatting options.
While I'm at it, I noticed the cookie is not encrypted, it clearly shows the password. This cant be good, huh? 
yes, this is the way password encryption works. password encryption is only one part of protecting passwords. It is really only useful to protect the password if someone gains access directly to the database.
the encryption happens on the server.
when the login form posts, the plain text version of the password is sent to the server, once at the server, it is encrypted, then used to compare against what is in the database.
to really protect the passwords, you should be using and SSL Layer on your protected pages.
