It saves a hash of the password that is used to log in. That way, your password is never stored on your computer and is never send over the Internet.
If someone grabs the password hash in some way (f.e. via malware on your computer, or via listening on an unprotected connection), the only thing they can do is using that password hash to log in to the lobby. They cannot reconstruct the original password, so in case you reuse your password for other services, they won't be able to impersonate you there.
Services that are able to tell you what your password is are inherently insecure (as opposed to services that can give you a new random password on request).
We currently don't offer a way to reset a password (which will probably get implemented some time), but at least we're secure.