The transmission hunting is a problem, but not for the engine. I'd be worried about trans life going back and forth between 2nd and 3rd at WOT.
I'm with Supercharged; something else going on there. I've pulled passes out west plenty of times no problem over 4000 rpm with my 200,000+ mile 5.7...
Definately something wrong. Pulled my 6,000 lbs Jayco up many long grades for miles at a time at about 70 mph at about 4,500 rpm in 2nd gear with my 5.7 Vortec Express van when it still had 3.73 gears. Pulled the 4L85E down to 2nd, flat footed the accelerator and let it eat, letting off the pedal some to hold 70 mph when it could. When I added tow/haul to the 0411 and programmed it properly, shifter in 3rd and it would hold 2nd gear on grades above 1/2 throttle. 2-3 shift set for 80 mph above 1/2 throttle. Gears made a bigger difference for me than the 350 to 383. With the 4L85E I tow in overdrive with a 5.13 gear, 70 mph @ 2,850 rpm. Only kicks down to 3rd and spins 3,700 rpm up long grades now.
That being said a friend of mine recently had a rod let go on a rebuilt L31 cruising about 70 mph at 2,000 rpm. Let go with no warning. No knocking, no loss of power, no overheating, no loss of oil pressure, just a big bang and quit running.