By storing so many passwords in one system, they made that system a high value target, all while not having the security chops they thought they had.

Password vaults should be distributed. This prevents the conglomeration of password secrets that creates a high value target. They would've been wise to have a series of password vault apps that are integrated with their system. They could have done this by leveraging Password Safe.

But not necessarily all of them all the time. The decryption key could be derived from the master password of each user and only kept around while the user is logged in.

Many providers do have an agent that runs on the AD servers that MitM captures the passwords when the user rotates them but that's a lot more involved to get setup. They could either force use of that AD agent or remove the functionality entirely and force users to manage a password with the service but it would either make on-boarding slow/impossible or really reduce the convenience factor for users. It's something every identity provider would need to do (or be forced to do) because the ones that didn't would steal away all of their customers.

If the latter, then OneLogin has to possess the ability to decrypt the passwords without user input (edit: although I suppose the SSO token coming from the client could be the key? I don't know if that's possible or how that would work - the key would still need to be cached for some period of time post-auth either way I would think)..