For those, like myself, wondering what exactly is going on, I debugged through this. While there might be multiple scenarios that lead to this bug, I believe they are similar to the following:
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In the file, ******\Saved\Config\Windows\Engine.ini , in the section “[Core.System]”, there are a list of Paths. These are content paths. They might look something like this:
[Core.System]
Paths=…/…/…/Engine/Content
Paths=…/…/…/…/…/…/MyUnrealFolder/MyProject/Content
Paths=…/…/…/Engine/Plugins/2D/Paper2D/Content
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When opening a level, the engine does an “external reference” check by verifying that content/assets are within one of the above paths.
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Sometimes during project conversions, the project converter doesn’t properly update the personal content path above ("… MyProject/Content" above). If the path to the content changed during a conversion, but the above path(s) in engine.ini weren’t correspondingly changed, the engine would be performing its “external reference check” against the wrong paths. Hence, the engine will claim an object is externally referenced, when it is not.
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(1) Closing the project, (2) changing an outer folder name of the project, and (3) re-opening the project DOES cause the engine to properly update the paths in engine.ini, which is why people suggest renaming the project’s outer folder to resolve the issue. Changing the outer folder name back to the original name is optional, and is only needed if you prefer the original path name.