The Hierarchical Level of Detail (HLOD) system must be enabled on each Level that wants to make use of it. You can enable the HLOD system by following the steps described on this page.
Steps
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From the Level Editor Toolbar, click the Settings button, and select World Settings.
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Next, inside the World Settings menu under LODSystem, enable the Enable Hierarchical LODSystem option.
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Finally, go to the Window option and select Hierarchical LOD Outliner.
End Result
The Hierarchical LOD Outliner window will open where you can define the parameters for your desired HLOD setup.
Please see Building Hierarchical Level of Detail Meshes for more information on HLOD setup.