I did discover that NI-Watchdog is not part of LabVIEW Professional, the Real-Time module, or NI-DAQ - which is why I didn't get the update from installing these three separate downloads. It's a part of the overall superset of NI Device Drivers which is included in the DVD distribution. The five separate CD-sized downloads that comprise the NI Device Drivers package are available at ni.com. That may be the disconnect.
The latest version of NI-Watchdog is 3.0; we have been using version 2.2. I don't see any standalone download for NI-Watchdog 3.0 on ni.com; you have to use the NI Device Drivers distribution to get it.
That said, you would think that running the MSI in the NI-Watchdog_Host and NI-Watchdog_RT product folders in the LabVIEW suite DVD distribution (which contain version 3.0) would fix/patch-over the problem, but it doesn't. I believe that running the NI-Watchdog_Host MSI does fix the RT Watchdog palette, but neither unpack the updated RTwatchdog.llb file.
The NI Device Drivers distribution does have the older NI-Watchdog 2.2 version; and if you run the MSIs for the older version, I noticed that it does unpack the RTwatchdog.llb into the 8.5 target vi.lib folder. The 3.0 MSIs do not.
I verified that you can just replace the RTwatchdog.llb file with the updated version manually if you have a copy and declare victory. Otherwise, it seems like the only way to get RT-Watchdog updated is to reinstall LabVIEW RT 8.6 from the Development Suite DVDs. I have replaced my RTwatchdog.llb file on my machines in the 8.5 and 8.6 folders. The local path for 8.6 is C:\Program Files\National Instruments\LabVIEW 8.6\Targets\NI\RT\vi.lib.