The volume is disabled because the iPods signal is no longer going through the iPods amp section. This disables your iPods volume control.
Now that we've established that when using the iPods LOD feature you bypass the amp section, thats one less stage and fewer parts in the way of the signal. When using the iPods headphone jack, you are double amping the signal from the iPod.
So better quality... yes. And is it noticeable, well with good ancillary gear, yes.