The Approximated Mesh HLOD layer cannot use its default materials: FullMaterialBakeOutputMaterial_PackedMRS and FullMaterialBakeOutputMaterial.
The Param2D names are incompatible and the materials are deemed invalid by FMaterialUtilities::IsValidFlattenMaterial
In any cases, UHLODBuilderMeshApproximate::Build will force the usage of GEngine->DefaultFlattenMaterial when Options.BakeMaterial is null or invalid
There's no existing public thread on this issue, so head over to Questions & Answers just mention UE-363562 in the post.