when I follow the instructions it asked me if I want to replace the existing Docklets file do I want that to happen?
Not sure what you mean by 'docklets file', but in general it's safe to replace all the old files when installing the new (2.5.11) version of SysStats. Yes, it's easier/better/smoother if ObjectDock is not running at the time.
When you download a 3rd party docklet, it *should* be packaged/zipped with the same directory structure as the SysStats install. Just copy the files from the docklet package to the corresponding folders in the SysStats structure. If not, then .INI files go in the "...\SysStats\Configs" folder, images in "...\SysStats\Images" (sometimes "...\SysStats\Images\