Yes if they are closing the 401K plan or going out of business. You have the option of moving the funds to a Financial Planner who can open an IRA for you or you can open one for yourself by going to a financial institution (bank or credit union) and open one yourself. If you are counting on that tax deduction and credit for the current and following years, you will need to make sure you continue to fund it regularly. If they are moving to a new provider for their 401K you can still opt out and move your funds to another plan. You need to make sure you do this on a plan to plan basis rather than getting the check and moving it yourself. The documentation gets aggravating for you from the IRS when you choose to do it yourself. If your company is changing 401K providers, you also have the option of removing your current funds to a separate IRA and joining the new 401K and starting a new account. Please do your research (Charles Schwab, RSM McGladry, Ameriprise, Edward Jones and others)all offer good IRA plan sand management).

They are not going out of business or closing out the 401k plan and as far as can be found out, they are not changing administrators of the plan. No one knows for sure why this is being done - we're told it's because some employees are too heavy in company stock - we've suggested limiting it instead of mandatorily selling or transfering it - they've said they couldn't do that. We know they are in a big stock buy back mode but this appears could come at the employees expense since the stock market hasn't completely rebounded and company stock shares are currently half or less of where they were.

The company can make changes to the available funds in their plan. A lot of big companies (kinney drugs for one) is not allowing any more purchase of their stock, and other companies are buying back all of their stock as well.
Their reasons are a mystery, as no one can know their financial status, or companies issues...
But yes, they have every right to make you change your investments, if they wish to eliminate that stock option. They must give you ample notice, but if you make no action, they will move the funds into a default option, as stated in your notice.