Yes that was it. I would think the default would be to uncheck that thing or not have it there at all as it defeats the whole point of encrypting the dang folder to begin with.
Observation:
Better to do image, new, custom, and then make disc image large so that you can fit lots of stuff and grow -- as opposed to the more convenient image, folder. (only con is you lose HD space)
In photo catalog software I have, file, open recent -- still brings up thumbnails that are in the disc image.
I guess for password protecting a folder this is as good as it will get. Just a tad cumbersome.