How is this a security flaw?

Not a security flaw but a useful feature. The eye only appears when you start to type or paste your password from your encrypted password manager.

Well, I think really it's a matter of choice and whether or not you access sensitive sites in public places. I've disabled it and feel more secure as I only want my passwords to appear as blobs or asterisks.

Like everything else, it is a matter of choice, as you rightly point out.
Perhaps a portable password manager on a flash drive such as KeePass Password Safe or similar would be more appropriate, as long as you don't lose the drive. In that way the passwords are not stored or copied to the clipboard for more than 12 seconds and you can carry it around for use on other computers other than your own.

http://keepass.info/download.html