I am confused. a 16" wheel is pretty big for a 3.5 year old. Are they on training wheels?
I would take the diapers off during riding (the saddle can handle pee). I would also put them back on smaller bikes if they are on training wheels.
I am probably in the minority, but I have seen very poor results when kids have bikes that are too big before they can really ride. It seems like a good economic decision, like buying pants a little big, but the kids will outgrow it, and the extra few months they get to ride it they generally need training wheels so they aren't riding it anyway.
Take the pedals off of a smaller bike or buy a used glider on craigslist. Get them to scoot around then go to the 16" when they are riding strongly.
Of course, if your kids are prodigies and are riding the bikes well without training wheels, then just take the diapers off when they ride and see if it helps. Kids butts are much more pliable than ours, so it would amaze me that the seat was doing the damage you are talking about.