I tested to see if I could simply remove the Login/Password/SecurityToken values from the .sfproj file, and got interesting results. I emptied those three fields in the .sfproj file, hoping that TWS would prompt me for new credentials the next time I opened it. Before re-opening the project file, lines 7-9 looked like the following:
Then I opened the file, and saw the following prompt: "Couldn't login to Salesforce with your account settings." Great! Now I expect to change the properties in the project to reflect my own personal credentials. So I right-click on the project in the solution explorer, select "Properties", and then enter my credentials. Then I save the project and exit. Then when I open the .sfproj file XML, I see my re-entered credentials UNENCRYPTED.