Encumbrance is not the issue.  I can individually select all the plate armor with the war hammer weapon on the horsey and have an encumbrance of 80.

I also noticed that when my city is attacked, my militia choose the plain war hammer and no armor at all.  I know that I played games in the past where I did not research weapon smithing and had the magic tech that gave the magic hammer.  In those cases, my militia had the magic hammer.  But in this save game, the plain hammer is chosen even though I have the mace and magic war hammer available.

edit: Clearified in above statment that the tech that makes the magic hammer and mace are researched.