The password might be sent in the clear -  but that is an SNA  SLU (the TN3270 
LU for the terminal session)  to PLU (CL/Supersession) session and as such 
would require looking into methods for encrypting SNA sessions in the Comm 
Server manuals.  I'm pretty sure it's not flowing over IP if TN3270 and 
Supersession are on the same system.  If you're going between systems it might 
be Enterprise Extender?  Which flows over IP and I'd guess Communication Server 
manuals would tell you how to encrypt that as well.
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