If the password is in clear text in passwd, something went wrong while creating the user or setting the password. You seem to be posting from Ubuntu 14.04. Every modern general-purpose distribution should be using "shadow utilities" by now. I just checked on Ubuntu 14.04: Got root shell, created new user with
useradd -m -G cdrom,plugdev,sambashare test
and set password with
And the password is not stored in passwd or shadow. A checksum of the password (and salt) is stored in shadow. The second column in passwd just contains "x". That is how it should be.
That raises the question: How did you create your users? Did you change something in /etc/login.defs?
Possibly quickest solution: Re-create the passwords with passwd. If everything is configured right, it should store checksums instead of clear passwords.