I am just a little curious... When your aeromodel is at 400ft - isn't it a spec in the distance? Especially if already 500ft laterally in addition to the height? When i flew aeromodels, I don't think we often went above about 150-200ft just because there isn't much point of flying something you can't see. We used to share an airfield and only had issues when they dropped their towed banners on top of us.
Also - I was under the impression that one could fly down to any height they wanted for a PFL, providing that you abide by the 500ft rule.
I personally would contact the flyers and just make sure that this won't ever happen again, be it contacting them prior to doing a PFL, or just making one another aware of the areas that one another use. Be friendly, and upbeat, apologising the near miss that your instructor and student did not see the model, and to ensure that in future no accidents happen, just to talk to one another prior to flight.