The player actually does put USB-loaded music files through its own DAC. It plays files from any kind of drive that can be connected w/USB (ipod, flash, etc.). The SQ difference between this and (e.g.) headphone-jack-to-RCA is quite noticeable. I'm still trying to decide if I can hear a difference between CDs, and lossless files from ipod/flash/etc.
I'm kind of surprised that (1) this feature of the player isn't more renowned, and (2) other players don't incorporate it. On the other hand, I suppose most folks listening to files on drives via USB have moved beyond physical discs (I'm not there yet), and just use DACs with this kind of input capability.
As I said, there are aftermarket ipod USB cables that are supposed to be an improvement over stock, and some are quite affordable. Audioquest has a bunch of cables of this sort. However, as Mateored suggests, the online consensus seems to be that you have to spend a fair amount of money to get a significant improvement over stock.
Based on responses here and elsewhere, it sounds like this may be a market that just isn't very active yet. I've only found one or two online discussions of these cables, that refer to actual experience by users. (There are, of course, "academic" discussions about whether they make any difference at all.) Frankly, I'm looking for someone to tell me that the less expensive cables are an improvement, but so far, as indicated, the word seems to be that money must be spent to get a significant improvement over stock.
For now, if anyone's interested, I'm looking at the Audioquest Cinnamon. A step above the Forest model, but not quite the Carbon, or the Coffee, or the $500+ Diamond. If/when I take the dive, I'll come back and share my experience.