In groups that I've been a part of, we've never done it. We probably looked askance at the "gamer shirt" guys too, but it didn't really bother us. Not a matter of embarassment at all, but I don't see the need, outside of a LARP or ren faire or something like that.
I don't need to dress up to feel in character, so for me costumes are unnecessary. D&D isn't a play (though it can be).