There are two aspect ratio settings in TMPGEnc, the source and destination. Check the destination aspect ration on the Video tab and the Source aspect ratio on the Advanced tab. The combination of the two should be set right for desirable output. Also on the Advanced tab, set your Video Arrange Method to Fullscreen or Full Screen (Keep aspect ratio) setting.
Are the black bars on the KVCD you burned, or just when you view the MPG on your computer
Is the video stretched or squashed verticaly to fit it in the viewable area