To save your time, here’s a one-sentence summary:
When a static mesh contains multiple LOD materials, all materials must have Dithered LOD Transition enabled, as even unused materials can cause the Dithered LOD Transition to fail.
I was working on some plants and set up 3 LODs, each with its own material. Later, I switched to 2 LODs and removed one, but I kept its material slot. I enabled Dithered LOD Transition for the first two materials but skipped the unused one, thinking it wouldn’t matter. Turns out, Dithered LOD Transition failed because of that.
Lesson learned: Make sure every material slot in your mesh has Dithered LOD Transition enabled—or just delete it.
It’s a dumb issue, but it wasted a lot of my time. I couldn’t find any discussion online about such a minor detail, so I hope this post helps people catch this problem and save some time (and sanity).