Yeah the LOD algorithm will be in the engine, but normally all that does is swap between separate pre-defined models depending on distance (this sounds like the case in this instance). You still have to make the models in the first place.
Dynamically generating LOD models is computationally expensive and rarely done on a platform like the PS2. If you’re using higher order surfaces like patches, then LOD comes as standard- they’re meshed at runtime anyway.
And PhantomDesign, there is a LOD utility for rendering in max, it’s under more in the utilities panel ‘level of detail’. I’ve never bothered with it though since it only works in renders, not the viewport.