You should put libraries in the libraries sub-directory of your Arduino sketchbook folder (e.g. ~/Documents/Arduino on Mac or My Documents/Arduino on Windows). You'll need to create the libraries/ directory. This way, libraries can stick around when you upgrade the version of Arduino. I'll try to update the documentation soon.
This works as stated...
~/Documents/Arduino/libraries/
However what initially confused me is there is an existing directory which is not correct...
~/Documents/Arduino/library/
Opening the Arduino package also works, but as stated, that makes updates difficult and very unMac like.
Other than that initial confusion I really like the new environment!!!