Bayonne scrum-half Phillips, 30, has to make do with a place on the bench for Saturday's Millennium Stadium encounter.
Scarlets scrum-half Tavis Knoyle will instead wear the number nine shirt as he wins his eighth cap at the expense of the 2009 Lions' Test half-back.
Wales interim head coach Rob Howley's selection has raised a few eyebrows within the Argentina camp, but Phelan does not expect Knoyle to be a weak link, particularly given the understanding he has with Scarlets team-mate and fly-half Rhys Priestland, who starts at number 10 for Wales.
Phelan said: "Yes, I was surprised, I thought he (Phillips) would be playing and I don't know the reasons (why he has been left out).
"But his replacement is a good player and he has continuity with his club team-mate.
"Wales have good players, a good XV and good replacements. It did surprise me but we know they have brought in another good player."
He added: "Wales have won the Six Nations this year, they are very competitive, they are playing good rugby, have a big pack of forwards and a good system of attack with their backs.
"We know we need to concentrate on all parts of the game as they are in good shape. They have good individual players and we are prepared for a tough game."
Phelan has named a side including veteran centre Felipe Contepomi, with Juan Martin Hernandez moved to full-back as Nicolas Sanchez gets a chance to impress at fly-half.
Gonzalo Tiesi returns in midfield for the first time since the World Cup and Juan Imhoff takes over from Horacio Agulla on the left wing.
Up front, flanker Julio Farias Cabello moves into the second row as a replacement for the injured Patricio Albacete with Leonardo Senatore coming into the back row.
In the front row, Leicester's Marcos Ayerza benefits from the retirement of Rodrigo Roncero and the absence of Francisco Gomez Kodela to start on the loosehead side of the scrum alongside Eusebio Guinazu and Juan Figallo.
Kodela, his Biarritz colleague Marcelo Bosch and Montpellier's Lucas Amorosino, were among those unavailable for selection as part of an agreement with the clubs in France, although they will return for fixtures against France and Ireland.
Phelan said: "For this tour we had a special agreement with the French union about not taking more than two players from each club (for each game), and in some clubs we have more players so we had to think what was best for this game as they have club games in France.
"That's the way it is. We have lost some players for this game and then for the other ones we will also have a mix.
"It was a difficult selection but the players that are available are in good shape and we are confident and feel we can do well."