Never Used the Kflop, but i have used the CSMIO/IP-A and this is closed loop between the motor / driver to the controller.
You can also use external linear scales as long as the output from the scales are compatible.
But and this is a big but the IP/A outputs +/-10V so can only be used with servos, so forget trying to connect stepper drivers.

Whatever you do, you will need to use an external motion controller because there is no way to get the encoder signals into mach3 without one.
However, i think you are over thinking thing, if the machine is a small mill like you mention, just upgrade the leadscrews to ballscrews and add stepper motors and you will be fine.
Moving from leadscrews to ballscrews is a must for CNC.