I think you've pretty much figured it out. I came to the same conclusion. It seems like the editor was made with the idea that it could access files in folders, but the game itself reads .pak files, which are like archive files (like a zip archive) but proprietary. I haven't been able to work out a way to unpack them though.
Essentially, I think when working on the game they had everything in folders and the editor worked fine. When they shipped the game, the packed it all up into .pak files for faster installation/download and this made the editor not work the same way it did when they were making the game.
Basically, they either need to implement unpacking into the editor on the fly, or give us a tool to pack and unpack the .pak files for their game.
