Learning about the birth of the “creative department” leads me to agree with you, it was okay for that time period. They were figuring everything out while the world was rapidly changing. We now know they didn’t have a solid grasp of art vs. design. Even now, as habit, we call the objects on the “art board”, ‘art’ when referring to it in haste.
From the articles I read about agencies, a lot of the really successful ones (maybe not so large) consider each and every member a designer. From the director to the graphic designer (mule studios comes to mind).
I do feel that calling it the Design department is necessary. It’s not about titles or sensitivity. It’s not even about making sure people respect what you do. It’s about keeping your mindset in a process and understanding that the creativity you exude comes from setting goals and solving problems. It has purpose and naming it as such is necessary in my mind.