The "rifle hand" being on top in in case you pass someone that salutes the ensign you will be able to return the salute. If you are walking with someone, they will return the salute.
This is an interesting point. The US Army protocol manual (FM 3-31.5) says:
Once the flag has been folded (cocked hat), it is treated as a cased Color and not saluted by persons meeting the flag detail. The flag will be treated with the utmost dignity and respect but not be rendered any sort of honors.
The Marine Corps Honors and Ceremonies manual (MCO P5060.20) says roughly the same thing:
A folded flag being carried to morning colors, or from evening colors, by a color detail is considered cased and not saluted.
I don't know if the Navy has any directive that addresses this, but it sounds like the consensus is that you don't salute a folded flag.