Your post is confusing. You say you're using Parallels Desktop, yet you are posting to a VMware Fusion forum. Your screen shot is indicating that the request for the virtual machine password is being presented by VMware Fusion, so I'm going to answer based on the assumption that Fusion is the product you're actually using.
> Is there any way to recover or reset the encryption password for this VM?
Resetting the password requires you to know it. Recovering the password is possible if you have used the Fusion option to remember the password in the macOS Keychain (specifically, your user's login keychain). To see if the password might be there, open the Keychain Access utility (you can use Spotlight to find it) and look at the login keychain. Look at the "Kind" column for "Virtual Machine password" and the "Name" column for VMware Fusion encryption". If you find one or more, open them by double clicking them. The "Where" field is the full path to the VM that the password is associated with. Click the "Show Password" button to reveal the password.
> If recovery isn't possible, what are the steps to regain access to the data/configuration inside the VM?
If your virtual machine is fully encrypted, there is no way to access any data for that VM because the virtual machine's disk files are encrypted. The data is lost if you don't have the password.
If your virtual machine is partially encrypted (which is the default for Windows 11 virtual machines), the virtual disks are unencrypted. You can regain access to the virtual machine by creating a new custom Windows 11 virtual machine. When asked for the virtual disk during the virtual machine creation, Indicate that you are using an existing virtual disk and use the file navigation box provided to locate the virtual disk of the old VM. Also make sure that you select the option to copy the virtual disk into the new virtual machine.
In addition, select partial encryption (Only the files needed to support a TPM device), provide a password of your choosing, and opt to remember the password in the Keychain. (and make sure you have an alternate way of remembering the password... just in case).
> Are there any built-in recovery options I might be missing in Parallels Desktop? VMware Fusion?
Other than remembering the password in the macOS Keychain or rebuilding a virtual machine with the original VM's disks (the latter is only for VMs that have been partially encrypted), there are no other "built-in" recovery options for a lost password. Fusion warns you of this if you create a VM with encryption and do not choose to save the password in the Keychain.
Good security practices dictate that there aren't any "back doors" that can defeat the encryption of a resource.