Usually this is done through LODs (Level of Detail). This is just a name for having several models of the same object with different detalization. In the options you may specify the highest LOD to use.
LOD models are usually made manually by artists because programmatic simplification often results in poor quality for anything more complex than a generic sphere. Programmatic approach may work well for untextures lowest quality models (usually used at a great distances from camera).
In the game you have e.g. 3 models, High-Medium-Low. High quality model is used from 0 to 50 meters away from camera, Medium from 50 to 150 and Low for anything farther that 150 meters. In setting you can specify Medium quality and then you rig Medium model to be used from 0 to 100 meters and Low otherwise. The exact numbers may depend on your game and models quality.