As Gerry said, encoder's attached on the motor or handwheel should make the DRO's work, but then I'm not sure about how they would work when still under power. Seems it would still be tough tyo turn them unless it was only the encoder's that were powered.
You can use handwheels for manual milling, you just won't have the Mach 3 DRO's with the typical stepper setup.

I do a small amount of manual milling with my mill. It doesn't have handwheels, so not really manual milling in that sense. I use the keys to jog and mill. I leave the jog set at about 5% and run the X and Y axes like that. If I need to make a faster move, I hold down the Shift key and use the jog arrow. This lets it run full speed.
I typically use the MDI screen for more precise depth settings on the Z when I am doing this.
Most guys find they never touch manual handwheels after you sink your teeth into Mach 3 a little more.
I had them on my router, but removed them as they seemed a safety hazzard and were redundant with Mach.
They are useful before you get a machine powered up though. Setting limit switches, finding travel extremes and things, but these can also easily be done with Mach in charge.