I agree with your criticism. However, the overarching design of KDE makes it reasonable because of configurability. There's an option for "always sort applications alphabetically", and the entire widget itself could be replaced with a different one. In fact there is even a concept of "alternative widgets" for this with two other options. I don't see something that matches your requirements that already exists but it seems like something that would be in scope for the project.

Also this is on version 5 but they had a major release of 6 recently, and I don't know whether those changes included anything to this widget.

Yesss. Gnome also does this with its file manager. Worst design ever. Second to only S0 sleep. I use Pcmanfm in all my gnome installations to have sane file navigation.