Employees are feeling a little better about their finances.

A recent Financial Finesse report finds that financial stress levels has continued to decline as the economy improves. Only 16% of employees reported high or overwhelming financial stress levels during the first quarter of 2012 compared to 21% in 2011 and 30% in 2010. (See the infographic on the facing page for details.)

While stress levels have improved, the report suggested that doesn’t necessarily mean they are more financially prepared. Of those who reported no financial stress 68% reported being unprepared for retirement, a majority had no will or trust and only half indicated they had enough life insurance to adequately protect themselves and their families.

“There was actually a small backslide in employee’s money management habits in the first quarter of 2012 following several years of improvement,” said Liz Davidson, founder/CEO of Financial Finesse. “Now some of this may be due to the fact that financial wellness programs are expanding and reaching more lower-income employees who naturally have more financial challenges, but it is still notable. The only group that is showing signs of improvement in their financial wellness are employees who are regular users of financial wellness programs and have committed to the process.”

She added that some financial stress is required to be motivated to make improvements to finances.

“Stress creates a sense of urgency, and there’s nothing like urgency to change behavior,” said Davidson. “All that said, they are ahead of the game compared to 2009 and 2010. Also, we’re seeing them become progressively more interested in financial planning, which is also a good sign. Today’s employee is proactive and financially aware in a way that employees were not even just a few years ago. Ironically, we believe that employees’ long-term focus could be contributing to the slight backslide we are seeing in employees’ day to day money management habits. With baby boomers nearing retirement, and an overall concern about inflation, taxes, and health care expenses rising in the future, we appear to be in a situation where employees may be saving for the long term at the expense of their short-term needs.”

Dollars that could be going to increase emergency funds and pay off debt are instead going toward long-term goals like retirement, which Davidson said is why retirement savings increased despite the decline in the percentage of employees who have emergency savings.

In addition, those with high levels of financial stress were overwhelmingly stressed about internal factors like their ability to make ends meet and to achieve future goals. By contrast, those who have relatively low levels of financial stress are much more worried about external factors they can’t control rather than internal factors that they have control over.