The issue is not with the power lock-on, but with your choice of track. Any lock-on provides power to only one rail (the center rail in 3-rail track) and requires ground (return) from the outer rail(s) of 3-rail track, but the lock-on is only connected to 1 of those 2 outer rails. Both outer rails can provide ground for the circuit only if the manufacturer electrically connects them like the original Lionel O27 or O gauge track where the metal ties create the outer rail electrical connection. With that connection, Lionel had to insulate the center rails with little pads between the center rail and the metal ties to prevent a short circuit with every tie.
When you throw that 3/2 switch on your engine, the engine is now looking for power from one of the outside rails, which power is now flowing through ground on the opposite outside rail. Unless there is something I don't understand, your lock-on just can't work in the usual 3-rail track situation.
Chuck
