Yes, that was one of the bad things with Elmo in Grouchland. They basically turned much of the film into an episode of Blues Clues.Well... Elmo in Grouchland was the bi-product of that annoying late 90's push in children's television to make everything pretend interactive... somewhere down the line they clearly wanted it to be a commercial for Elmo's World.
Fourth Wall, if done right (in the cases of the first three movies where they're self aware they're in a movie) could work.
For me, Follow that Bird was like, Sesame Street meets the real world.
The Grouchland film was Sesame Street meets more fantasy. I'm still disappointed that none of the movie was filmed outside.
And yes, breaking the fourth wall could definitely work if done right. The Muppets are no stranger to it.