I had this problem so many times in UE3 also, not sure if I am missing something here, or if it is a hard to solve technical limitation, but it is in any case annoying to deal with.
I have following setup. A game in which you hold a pipe. Pipe is physics actor you picked up from the ground.
The moment I release the pipe, it is suppose to fall back down to earth. I accomplish this by detaching it, then re-enabling simulate physics. This works, but in particular when I give the pipe additional velocity by jumping up and then releasing it, it tends to just fall right through the ground.
Sometimes it is semi submerged. This happens in particular when the pipe hits the ground with its bottom surface first (so when surface area at impact is smallest).
I had the same problem in UE3 with thin small objects, I never managed to keep those in the world.
I have tried to enable and change:
-Higher mass scale
-Continuous Collision Detection
-Always Create Physics State
-Position Solver Iteration Count 16
-Velocity Solver iteration Count 16
None of that helped. My fault? Known limitation?