You're not really talking aobut AAA encryption here, cause you seem to be more worried about the telnet session between the client and the switch. This session really doesn't have anything to do with AAA other than initially prompting you for a username/password, it's still just a telnet session, and as per the telnet spec none of this traffic is encrypted. Passwords, the config, everything that goes over this session is susceptible to being captured, AAA has nothing to do with encrypting this traffic. If you want your session to be encrypted then you have to use something like SSH, no way around it.