What is covered by "Encrypt phone"?
Encrypt phone only encrypts the /data partition.

Encrypting the SD card is a separate function and isn't implemented in stock android.  Some manufacturers (I know Motorola and Samsung do) extend the encryption (optionally.  Where you find "encrypt phone", you'll also find an "encrypt SD card" option) to the SD card.  I can't determine whether cyanogenmod implements such a function or if it may be device-specific.