Apparently folder splitting works, but I've always seen it as a way to disable unwanted textures temporarily. Maybe dolphin searches subfolders if there isn't a matching texture in the main folder.
All dolphin versions post-4.0 should use the My Documents/Dolphin folder, unless you specifically tell them not to. Deleting the game ini from the 4.0.2 folder may have triggered it to regenerate it, in which case the one in the my docs folder will have been replaced by a 4.0.2 one, rather than the one belonging to whatever newer build you have. This could potentially cause the problems in the newer build if it didn't see the ini it was expecting. This paragraph is speculation, though.
As for what specifically the yellow text is telling you, Dolphin has an ini file for each release game with certain settings which are required for accuracy noted down inside. When you open a game, if a setting is set by the ini, Dolphin will ignore your global setting, and use the one from the ini instead. In this case, it's telling you that even though you have EFB copies to Texture etc. set in Dolphin's global settings, the ini is changing this to EFB copies to RAM etc. to stop the game breaking.
All dolphin versions post-4.0 should use the My Documents/Dolphin folder, unless you specifically tell them not to. Deleting the game ini from the 4.0.2 folder may have triggered it to regenerate it, in which case the one in the my docs folder will have been replaced by a 4.0.2 one, rather than the one belonging to whatever newer build you have. This could potentially cause the problems in the newer build if it didn't see the ini it was expecting. This paragraph is speculation, though.
As for what specifically the yellow text is telling you, Dolphin has an ini file for each release game with certain settings which are required for accuracy noted down inside. When you open a game, if a setting is set by the ini, Dolphin will ignore your global setting, and use the one from the ini instead. In this case, it's telling you that even though you have EFB copies to Texture etc. set in Dolphin's global settings, the ini is changing this to EFB copies to RAM etc. to stop the game breaking.
OS: Windows 10 64 bit Professional
CPU: AMD Ryzen 5900X
RAM: 16GB
GPU: Radeon Vega 56
CPU: AMD Ryzen 5900X
RAM: 16GB
GPU: Radeon Vega 56