I've solved the issue after reading the documentation deeper. You have to point the redirected folder to a path AFTER the %USERNAME%. It cannot end with the variable.
Once I used "\\domain.com\dfs\userhomedrive\%USERNAME%\My Documents" (without quotes) everything seemed to work. I really wish it would work without adding "My Documents" at the end since the root of their folder is the root of their My Documents typically. But, it works for now.
Hope this helps someone else in the future.
Rob