A school can ask for the value of your retirement to determine your eligibility for their institutional money (grants or loans) but the question is not even asked on the FAFSA. It is asked on the CSS Profile app or another institutional app of the school's choosing, some schools do and others do not. I encourage my students to think about retirement early on with a Roth and have taken the attititude that if all the kids have an $8000 roth, they are all the same since I am ranking them based on their income and assets (financial strength). In other words, I wouldn't penalize for retirement assets but some schools view it differently.
When you as an FA are trying to help the poor kids, you may not award something to the kid with a $10,000 401 since you cannot expect me (the school) to spend my money to educate you if you won't spend your money to educate you-- it's not my education.
I wouldn't be quick to liquidate your 401 though. Your primary residence is the same way, not on the FAFSA but asked for on other apps.