One could argue that authenticating via 1Password is already multi factor in itself e.g. Master Password is Something You Know as the first factor and access to a 1Password Vault is Something You Have as a second factor (since you cannot login to 1Password with just username and password, but also requires a Secret Key that can only be acquired from a device that already logged in).

In this case TOTP acts more like an insecure one-time session key.

Yes. 2FA protects, among other things, against compromised passwords. Having both on the same device does not reduce this protection.