Post fix

It works again!

@Builder
public record MyRecord(String myField) {
}

Pre fix

It was a known IntelliJ bug. There was, however, a workaround:

public record MyRecord(String myField) {
    @Builder public MyRecord {}
} 

Important: Once you insert the @builder inside the record, you must remove the @builder above it

Following up on this and with some help online from the IntelliJ developers, I had tried the following steps to resolve this --

1. I was assured that it looks more about javac-lombok interaction and was not connected to IDE.
2. I could actually gain the confidence to try running the code despite the highlighted error(which looks like a compile-time error) and it successfully executed to print "14" as expected.
3. I can confirm that after disabling the "Lombok Plugin" installed in the IDE, the highlighted error disappears.

Note: The second step was with the plugin installed. So in short, it just happens that the plugin gets to highlight the code as if it wouldn't compile, but the actual execution is handled by IntelliJ properly. (Kudos!)

Edit: With the 1.8.20 release, Lombok prevents a record to be annotated with an AllArgsConstructor any more. You can access the official changelog here.

You can achieve the same outcome not by @Builder.Default but by defining the builder itself with defaults for Lombok:

@Builder
public record FileProperties (
        String directory,
        String name,
        String extension
) {
    public static class FilePropertiesBuilder {
        FilePropertiesBuilder() {
            directory = System.getProperty("user.home");
            name = "New file";
            extension = ".txt";
        }
    }
}

Then to test it:

public static void main(String[] args) {
    System.out.println(FileProperties.builder().build());
}

Output:

FileProperties[directory=/home/me, name=New file, extension=.txt]