Theological: The people have asked that the atonement of Christ be applied to them, and the Spirit obliges. They receive a remission of their sins, and they are filled with joy. Remember that Benjamin was delivering tidings of joy and that joy in the Book of Mormon is specifically related to the experience of with the power of the Spirit (see the comments on 2 Nephi 2:25).
Historical: Based upon modern LDS interpretations of theology, the remission of sins through the atonement of Christ requires the ordinance of baptism. One of the ways in which we may read this incident is to assume that baptism was a common ordinance, and that all of the population were baptized prior to this occasion. While this may have been the case, the text of the Book of Mormon does not clearly declare it, and the contexts of baptism at this point in history suggest that baptism may not have been as common an event in the Nephite/Zarahemlaite life.
As noted in the comments on 2 Nephi 31 where baptism is introduced to Nephi’s people, it is initiated in a cleansing role, not in the full role of cleansing and covenantal acceptance of Christ. The specific function of baptism as a covenantal declaration of belief in Christ will not appear clearly in the Book of Mormon until Alma the Elder begins baptizing in the Land of Nephi.
Would all of the assembled people have been baptized? Certainly it is possible, but in order for this to have happened, Mosiah 1 (Benjamin’s father) would have had to have instituted it and required it of the entire people. The Zarahemlaites had lost their God and would have lost most of the Mosaic law, but baptism prior to Christ’s earthly mission is known in the Old World only as a cleansing ritual, and the association of that cleansing with the mission of the Messiah is known to be explicit only in Nephite history. Thus the Zarahemlaites would have had no tradition of baptism, and it would have to have been taught to them. While Mosiah as king might have required it, the very nature of the baptism as a willful acceptance of the atonement of Christ requires repentance and a willing change of heart. That requirement is inconsistent with a mandated ritual.
The political and religious difficulties that continued into Benjamin’s reign were the result of the class of cultures occasioned by the merging of the Nephites and the Zarahemlaites. The severity of those contentions in Benjamin’s reign are quite suggestive that there was no universal agreement among his people concerning the need for baptism as a signal of their acceptance of Jesus Christ. Although Christ was certainly taught to them, the Christological focus of Benjamin’s speech and the particulars of their covenant suggest that this is new to the people, at least on a city/nation-wide scale.
When we review Nephi’s introduction of baptism into Nephite ritual, we remember that it was a new covenant then, and one that had an ambiguous fit into known ritual (see the commentary on 2 Nephi 32:1). When Benjamin declares the atonement of the savior, he mentions nothing about the necessity of baptism to access it. Benjamin’s emphasis is on the atonement itself, and Christ as the provider of that atonement. The implication of his argument is that the population is still considering the rites of the law of Moses as the means through which atonement for sin would occur. When this information is combined with the story of Alma the Elder where baptism appears to receive a renewed emphasis at his hands, it is very possible that at this point in Nephite history, baptism is not a widely practiced ordinance.
When the Spirit descends upon the assembled population of the land of Zarahemla, the sins of the people were cleansed. There were probably many among them who were not baptized, yet the atonement was applied due to their faith. We should not be overly concerned that the forgiveness of sin might occur without baptism, as this event is taking place over 100 years before the earthly mission of Christ when baptism and forgiveness of sin will be inextricably linked. For peoples prior to Christ’s earthly mission, that future event could yet provide remission of sin, it is just that the mode of declaring spiritual acceptance of that atonement was different. For Benjamin’s people, it was this universal declaration of faith in the message of Benjamin. As a people supposing the remission of sin through the application of sacrificial blood, they ask that the Lord: “…apply the atoning blood of Christ that we may receive forgiveness of our sins” (Mosiah 4:2).