I tried this at work using Xamarin Studio 5.7.2 and a Windows 7 64 bit version. And there was no problem. So why you are having this issue I can not say. But I found this solution that indirectly talks about your problem – and the solution seems to be that you should
specify the default runtime in the MonoDevelop global options: Preferences->.NET Runtimes
Anyway compiling with 3.5 might give you some problems such as the what you have just experienced yourself. The reason that you all of a sudden can not compile the default program that comes with plugin is due to the fact that default parameters are a feature that was introduced in C# 4.0. Why you are able to get the plugin to work when selecting setting the target frame work to 3.5 I can not explain. I hope that you find a way through.