To the best of my knowledge the intrinsic Photo album app has no easy method for creating sub-albums. For instance, if you want to have individual albums for each vacation there is no easy way to do that.
You will need to create the album on your computer first, put the photos in it. Then use iTunes and sync with your iPhone. Once created, you cannot add or delete pictures from these sub-albums, unless you do it on the computer and sync again.
This is the only way I've found to do this. If I am wrong I hope someone will correct me. So far I have not found another way.