I have the same question. I was reading the SEO article at the link below and the author suggests changing permalinks to /%postname%/. The author then says: "Once you've done that, you'll want to install the Redirection plugin, and make sure that under Manage -> Redirection -> Options, making sure both URL Monitoring select boxes are set to "Modified posts". Now you can change those permalinks to perfectly SEO'd permalinks without having to do anything else, or worry about the search engine consequences."
I only see one select box for "URL Monitoring" under "Options", and I have set this to "Modified posts". Unfortunately, it doesn't seem to be working and when I navigate to one of the old post urls I still get a 404 Page Not Found.
Any advice would be much appreciated?