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Just a reassurance post that, AFAIK, you did nothing wrong and missed nothing in the setup.
I had never heard of this before, although historically the game has had problems adding new leagues, designating their levels properly, and correctly integrating them with the major leagues.
I tested it and got the same results as you. No matter what you choose as a level, it ends up "All Levels" which, by the way, is a selection on the Add Minor League menu. What "All Levels" means, I don't know. Maybe a development league as you intended.
Two things that I noticed, however, don't bode well. First, the "All Levels" team appears at the top of the Minor League System Report. Second, right-clicking any of the players newly created for that league gives the options of moving him to other minor league levels; in all cases, it's a demotion.
Let's see if anybody who sees this knows something about it. In the meantime, you may want to search Tech Support to see if anybody has reported it there. If not, you may want to post it yourself.
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