Rebalancing adjusts your asset mix to a specific target. Let's say you've identified your ideal asset mix right now to be 75% stocks and 25% bonds. You then set your contributions to invest in that ratio.
Over time, your stocks will grow in value while your bonds will remain stable. As your stocks appreciate, they'll account for a higher percentage of your portfolio assets. Your mix might evolve to 85% stocks and 15% bonds, for example. This is more stock-heavy than your target, which means it's also riskier than you want.
To rebalance, you'd sell off enough stocks to bring your exposure back to your 75% target. You'd then use the proceeds to buy bonds. This process, done manually, can be tedious if you hold several funds.
Auto-rebalancing gets you out of this job. Once you set it up, your 401(k) processes the transactions needed to keep your portfolio balanced on the schedule you select.