Mesh explodes with lower LODs

Hi.
* Retransferring weights from the corresponding LODs - this is unnesessary
* Normalizing the weights - s4s does it for you and if it were to do it in a way that is unfortunate, you'd see it in CAS;
* Limiting groups total to 4 - same as above
* Comparing the new mesh's vertex group list to the item I cloned the package from (yfBody_DressPanels) and making sure they're identical - yes, that is the right answer but not the cause of your problem;
* Making a (couple) of new packages and redo the whole thing (LODs etc included) - no need in that

Does vertex paint change in lower LODs? - no

In your case, the problem seems to be related to the meshgroups.
DressPanels comes with one meshgroup in lod0 but two in lod1. You seem to have deleted that extra meshgroup which is something one should never do. Your lod1 should have 3 meshgroups and the second one should be the same the original.

There is no base game item that is affected by skirt bones but is made of one meshgroup in all lods. There is one that is split in a more fortunate way, though
So instead clone yfBody_DressSunHalterEmpire, export the blend, append s4studio_mesh_2 ( a finger) from it to your scene, delete that area from the body, change the transparent part's cut number to 0002, add new meshgroups in Warehouse as usual, import the edited blend