The Premier League giants failed to progress beyond the group stage in Europe's premier club competition in 2011-12.
"Europe's always big at this football club," Phelan told United's official website. "The traditions are set within the European boundaries for Manchester United and we know we have to do better.
"We let Europe slip from our grasp too easily last year. The players are conscious and aware of that, although we haven't dwelled on it as that wouldn't be positive.
"We've put it down as a blip, but we know we have to do better."
United have been drawn against Braga, Cluj and Galatasaray in Group H.