Before your can use the Proxy Geometry tool you will first need to enable it. In the following How - To we will take a look at how you go about enabling the Proxy Geometry tool in your UE5 projects.
Steps
First launch your UE5 project and once it has opened, open up the Project Settings by going to the main toolbar and selecting Edit > Project Settings.
Once the Project Settings is open, go to Editor > Hierarchical LOD Mesh Simplification and under the General section click the Hierarchical LOD Mesh Reduction Plugin and then select the ProxyLODMeshReduction plugin.
Then go to Tools and then click on the Merge Actors option.
End Result
When the Merge Actors tools is open, you should see two icons at the top. Click on the second icon to access the options for the Proxy Geometry Tools.
Note that all options will be grayed out until a Static Mesh that is placed in a level is selected.