I'm a contractor at a company interesting in investing in their 401k. If I know I'll be leaving this company in a year or so what sort of time horizon and risk exposure is applicable? I'm not sure how rolling over works, but my plan is to roll over into my vanguard account. I can imagine 2 scenarios. If the proceeds from the funds in my 401k are directly transferred to my Vanguard account then it seems like I should be considering this a short time horizon investment (since the funds will be sold). Alternatively, if the actual funds themselves are transferred then I could go with a long time horizon strategy. My intuition tells me the former is the case, in which case I was thinking investing in something like a money market fund might be the best strategy.
You will be rolling over the proceeds, since you can only deposit cash into an IRA.
However, this should probably not affect your considerations much since the pre-rollover sale is non-taxable within the 401k and the period of roll-over itself (when the cash is uninvested) is relatively short. So, whatever investments you choose in your 401k, you'll just sell them and then buy them (or similar investments) back after the rollover to the IRA.
If you're worrying about a flash crash right on the day when you want to cash out - that can definitely happen, but it is not really something you can prepare for. You can consider moving to money market several weeks before the potential date of your withdrawal, if you think it will make you feel safer, otherwise I don't think it really matters.
The time horizon for your 401K/IRA is essentially the same, and it doesn't stop at the day you retire.
On the day you do the rollover you will be transferring your funds into similar investments. S&P500 index to S&P 500 index; 20xx retirement date to 20xx retirement date; small cap to small cap...
If your vested portion is worth X $'s when the funds are sold, that is the amount that will be transferred to the IRA custodian or the custodian for the new employer. Use the transfer to make any rebalancing adjustments that you want to make. But with as much as a year before you leave the company if you need to rebalance now, then do that irrespective of your leaving.
Cash is what is transferred, not the individual stock or mutual fund shares. Only move your funds into a money market account with your current 401K if that makes the most sense for your retirement plan. Also keep in mind unless the amount in the 401K is very small you don't have to do this on your last day of work. Even if you are putting the funds in a IRA wait until you have started with the new company and so can define all your buckets based on the options in the new company.