user_groups plugin enabled.

Under the admin - > admin -> assignments tab only administrators, bozos and viewers visible in the dropdown?

Not familiar at all with this but I guess these are the default groups. Or do you have already some and they are missing?

I created a few users for testing.
Then tried to change the assignments afterwards and stumbled upon this.

I see on my installation:
*no group selected administrators album managers bozos default newusers viewers
I suggest you look on the groups tab and see what is listed there. Perhaps you have removed some of the default groups? They will not come back if you did. (Actually, you can "cheat" and use MySQL to delete the option defined_groups and things will go back to original. However if you do so you should also delete all groups and templates that you did not create or you will get setup errors for duplicate entries.)

I followed your suggestion to "cheat" so everything is fresh now.

Here's what I see in the dropdown under the users tab(when a user is expanded):
*no group selected administrators album managers bozos default newusers viewers
When I assign the group administrators, bozos or viewers to the user, all goes well.
When I assign the group album managers, default or newuser to the user, the group is indeed assigned but it does't show in the dropdown.The dropdown then shows *no group selected.

And here's what I see in the dropdown under the assignments tab:
administrators bozos viewers

the *no group selected is expected as these are Templates, not groups. Templates are one-time application of rights, etc.

Also for the same reason the assignmetns tab does not show those items. Guess I did not read your initial post carefully enough. Sorry.