Does it take away from fun? It depends on the group's idea of fun. It certainly makes the game less deadly, and probably a lot easier. It removes the apprehension for pressing on. "We're low on health/spells/consumable resources" "Screw it, if we wipe, we just come back." There is no worry about going into a dangerous situation because the party will always come back (possibly growing less attached to the characters because there is no real threat). With death being so cheap, how will the players really care about their success?
There are a few approaches I can think of:
Embrace the "gamey" aspects. Dark Souls had a respawn mechanic that still penalized the player, you loose your souls and everything respawns. You can fight your way back to your souls to recover them (if you die before you get there you loose them for good). Also this game is really frickin hard. You will die, a lot. The tiny triumphs are all the more potent because you work so hard for them. You could make a really difficult dungeon quest and run the game like this. Constant enemies and loosing all the built up experience.
A sanity mechanic from coming back from the dead would be an interesting twist. You can keep being brought back, but you change as you go if you fail the saves.
Don't put death on the table. Encourage risks, and the PCs can only be KO'd at 0 HP of less. They don't have to worry about dying. (Already said)
Go play a video game, I have friends who love Wow this seems like it works there.
Fight out of hell- if there is a TPK, the party is captured by Death and brought to the Abyss. Here they must fight to reach or a spirit portal to be returned to their bodies. I would make the campaign without dungeons so that the Abyss could be a crawl/search mission to find a portal out of there. The time spent in the Abyss could cause the BBEG to gain an advantage in the campaign (better resources, spells prepared specifically for the party, more enemies to fight) which would penalize them without loosing characters or gear. If you use inherent bonuses from the character's power rather than from magic items, loss of gear matters a whole lot less. Sure your long sword was stolen, but you still have +3 fists and can kick someone's ass for a sword, or buy one if you are near traders. If you want to have the Flaming, Shocking, Frost, Keen, et al. weapons- make them inherent too or some magical brand that the PCs can be enchanted with. Now any weapon held in the fighters hand can burn an enemy, the wizard can always shimmer and make finding her harder, etc (don't skimp on Monks for this, they can use the help).