There is no "downgrade".
When I create an engine, it will almost always be capable of far more in every area individually than when I am running all parts of the engine simultaneously. An engine is responsible for more than just the graphics. It also needs to run the hundreds of thousands of lines of code that are handling random events, loot tables, scripted world scenes, quest timings, dynamic weather systems, AI schedules, etc., etc., etc. Every part of the game.
Of course, when I am dealing with just the rendering, I can go nuts -- crazy amounts of detail. As soon as I start introducing the other parts of the game, I wind up in situations where I might not be able to pull off quite that much visual fidelity and still have the system resources to make everything else work consistently and stably. Different parts of games like this do not connect like people think they do in their minds. Computer programs do not operate on human logic -- they operate on mathematical logic. These connections are not always going to make human sense. Hence, the number of distant buildings drawing in at a higher levels of detail...might be what's causing a bug that prevents a quest from triggering a flag in its script. The quest may break because the engine is too busy prioritizing LOD. The script gets postponed by the engine so much, that another flag fires first and creates a dead end, or an endless loop. In some other spot, the reason a nearby object receives a corrupted texture is because there are too many dynamic lights and shadows on-screen, and the engine can't make the call it needs to get that texture decompressed in time.
There are a million possible combinations, and a million possible ways for things to break, and a million possible ways to work around them. But it's a balancing act. It doesn't matter if a player has a super-high-end GPU capable of running the game at 4K, 200+FPS. If the engine is not able balance all of the games critical functions, then in order to fix the issue, I need to take from one area and give to another. Regardless of hardware, engines are still bound by their own code. (This is why engines for all games go through multiple iterations and versions, and new engines are created all the time -- to do what prior engines could not do.) Graphics processing is only one cog in a huge machine of moving parts. All of it needs to be taken into account. It's never as simple as saying, "Just do it this way."
So, there's no downgrade. It's optimization to ensure all functions of the game are able to execute properly. This may mean that LOD needs to be dragged in a hundred meters or so. Later on, it may be possible to push it back out again. All depends.
Or, another metaphor for this is: "Just because my Ferrari is capable of doing 210 mph, if I try to take that turn at 210, we'll go off the road an flip. Need to take that at 120 tops." Maximum is not the same thing as optimal.