Personally I would consider a 401k asset illiquid only if the owner of the asset was too young to convert it to cash without suffering an early withdrawal penalty. After they've hit 59.5 years of age it's as liquid of an asset as the 200 bottles of wine we have on racks in our dining room. At least in my opinion. The tax issue only seems relevant if the taxes are higher because the person is not yet old enough to convert them to cash without a tax penalty.
Back to the original question, yes, the OP's friend might be making a better decision if they only withdraw a certain amount each year in order to keep their tax rate low* but that doesn't make the asset illiquid. It only makes liquidating illogical. I certainly consider all the stocks in my non tax advantaged e*trade account to be liquid despite the fact that if I sold them today I'd likely pay a higher tax rate on the capital gains than I will if I wait and sell them once I've stopped working and am in a lower tax bracket.
*spending a few minutes calculating the cost from a tax perspective of getting a loan that would be repaid over a few years vs. selling off a large chunk of 401k in one big lump would probably be time well spent. Depending on the amount of money involved maybe the decision is as easy as take half out in December of this year and the other half out in January of 2019.