You did not include the LabVIEW project, so it is unclear how the project has been configured. Regardless, there is still one giant bug in your architecture. For the encoder to work in the FPGA, the two XOR gates that monitor the encoder inputs should be monitored at the fasted rate possible, (i.e. 40 MHz). When a single transition is detected a single count is added or subtracted to the position. The count is unchanged if no transition.
Your code has a 125us delay inside this loop where the position is calculated and sent to the FIFO. These have to be in separate loops. Monitor the inputs at 40MHz in one loop and then use the delay to feed the current position into the FIFO in another loop.
You might be able to eliminate the compiler warning by configuring the Open FPGA Reference with the compiled bit file instead of the VI name.