Exchange retention policy - deleted items folder problem

That's probably just a cosmetic issue. Just in case though, a brief history lesson 🙂
Few years back, Microsoft introduced a change that basically ignores the Deleted items tag for the Default MRM policy. The reasoning was something along the lines of "users dont expect Deleted items to be automatically removed after 30 days and this generates a lot of support tickets, but at the end all they did was create more confusion if you ask me. To work around this, create a new policy and assign the tag therein. Here's a link to the original announcement, just in case: https://www.microsoft.com/en-us/microsoft-365/blog/2015/02/20/extended-email-retention-deleted-items-office-365/

As I can reproduce this behavior with a custom policy too, and one that actually has a working Deleted items tag, I'm almost certain that it's just cosmetic. As for recoverable items policy, there are a bunch of folders therein, and Microsoft is actually making some changes on how retention works: https://www.michev.info/Blog/Post/3457/updated-retention-settings-for-the-recoverable-items-subtree
You'd probably only want to configure the RetainDeletedItemsFor value.