set-managedfolders.ps1

<#
  .Synopsis
   Sets folders specified retention flag to custom flag in Exchange online
  .DESCRIPTION
   This script is based from the following sources. 
    https://blogs.msdn.microsoft.com/akashb/2011/08/10/stamping-retention-policy-tag-using-ews-managed-api-1-1-from-powershellexchange-2010/
    http://blogs.perficient.com/microsoft/2016/03/office-365-script-to-recreate-managed-folders-functionality/
    This script search for and sets all folders found for the retention flag specified.  See this blog post for more information:
    
	.PARAMETER  TargetMailboxes
		A file that contains mailboxes that you want to populate.  Single user per line.
        IE user@domain.com
           user2@domain.com
    .PARAMETER  logfile
        Name of a logfile to create with results

	.PARAMETER  FolderName
		Name of the folder to search for and update.

	.PARAMETER  RetentionTag
		Name of the Retention tag to assign to the folder.
		
	.PARAMETER  AutoD
		If specified as $True, Autodiscover is used to determine the EWS endpoint.  Default
        	value is $True.

	.PARAMETER  EwsUri
		EWS endpoint for target mailbox.  Default value is to use Office 365 if not using Autodiscover.

	.PARAMETER  ApiPath
		Location of EWS API.  Default path is "C:\Program Files\Microsoft\Exchange\
        	Web Services\2.2\Microsoft.Exchange.WebServices.dll".

	.PARAMETER  Version
		Exchange version to be used by EWS.  Default is "Exchange2013_SP1" and likely
        	does not need to be changed.
    .PARAMETER  ConnectionUri 
        Connection to Exchange online

	.EXAMPLE
		.\Set-ManagedFolders.ps1 -TargetMailboxes c:\temp\mailboxes.txt -logfile c:\temp\mylog.log -FolderName "ok" -RetentionTag "TestRetention"
    
#>

Param(
    [Parameter(Mandatory=$True)]
        [string]$TargetMailboxes,
        [Parameter(Mandatory=$True)]
        [string]$logfile,
        [string]$FolderName='ok',
        [string]$RetentionTag='TestRetention',
    [Parameter(Mandatory=$False)]
        [string]$AutoD = $False,
    [Parameter(Mandatory=$False)]
        [string]$EwsUri = "https://mail.office365.com/ews/exchange.asmx",  
    [Parameter(Mandatory=$False)]
        [string]$ApiPath = "C:\Program Files\Microsoft\Exchange\Web Services\2.2\Microsoft.Exchange.WebServices.dll",
    [Parameter(Mandatory=$False)]
        [string]$Version = "Exchange2013_SP1",
    [string]$connectionUri = 'https://outlook.office365.com/powershell-liveid/'
)
function Get-MailBoxfolders
{
  [CmdletBinding()]
  param
  (
    [Parameter(Mandatory=$true, Position=0, HelpMessage='A service that points to exchange instance you wish to query')]
    [Microsoft.Exchange.WebServices.Data.ExchangeService]$Service,
    [Parameter(Mandatory=$true, Position=1, HelpMessage='A mailbox (smtp) that the service has access to')]
    [string]$targetMailbox,
    [string]$Folder2Find
  )
  
  #$ImpersonatedUserId = New-Object -TypeName Microsoft.Exchange.WebServices.Data.ImpersonatedUserId -ArgumentList ([Microsoft.Exchange.WebServices.Data.ConnectingIdType]::SmtpAddress, $TargetMailbox)
  Write-Verbose -Message "create an object that gets the root folder for the mailbox"
  $fvFolderView = new-object Microsoft.Exchange.WebServices.Data.FolderView(1000)
  $fvFolderView.Traversal = [Microsoft.Exchange.WebServices.Data.FolderTraversal]::Deep
  $folderid = new-object Microsoft.Exchange.WebServices.Data.FolderId([Microsoft.Exchange.WebServices.Data.WellKnownFolderName]::MsgFolderRoot,$targetMailbox) 
  
  $tfTargetFolder = [Microsoft.Exchange.WebServices.Data.Folder]::Bind($service,$folderid)
  
  $findFolderResults = $tfTargetFolder.FindFolders($fvFolderView)
  
  foreach($folder in $findFolderResults.Folders){
    if($folder.FolderClass -eq 'IPF.Note')
    {
      $parentfolder = ($findFolderResults.Folders |?{$_.id.uniqueid -eq $folder.ParentFolderId.UniqueId}).displayname
      if(-not $parentfolder)
      {$parentfolder = 'Root'}
      if($Folder2Find)
      {
        if($folder.DisplayName -eq $folder2find)
        {
              [pscustomobject] @{
            'name'= $folder.DisplayName
            'folderid' = $folder.Id.UniqueId
            'ParentFolderName' = $parentfolder
            'ParentFolderId' = $folder.ParentFolderId.UniqueId
            'folderclass' = $folder.FolderClass
          }
        }
      
      }
      else
      {
        [pscustomobject] @{
          'name'= $folder.DisplayName
          'folderid' = $folder.Id.UniqueId
          'ParentFolderName' = $parentfolder
          'ParentFolderId' = $folder.ParentFolderId.UniqueId
          'folderclass' = $folder.FolderClass
        }
    }
  }
  }
  }
  
'___________________________________'|out-file -FilePath $logfile -Append
get-date | out-file -FilePath $logfile -Append
'___________________________________'|out-file -FilePath $logfile -Append
$ImpersonationCreds = Get-Credential -Message "Enter Credentials for Account with Impersonation Role..."
$Session = New-PSSession -ConfigurationName Microsoft.Exchange -ConnectionUri $connectionUri  -Authentication Basic -Credential $ImpersonationCreds
Import-PSSession $Session
If((test-path -pathtype Leaf $TargetMailboxes) -and (Get-Command get-mailbox -ErrorAction Ignore)) #test target mailbox if
{
    $mailboxes = get-content $TargetMailboxes
    $returnStatus =@()
    Add-Type -Path $ApiPath
    $ExchangeVersion = [Microsoft.Exchange.WebServices.Data.ExchangeVersion]::$Version
    $Service = New-Object Microsoft.Exchange.WebServices.Data.ExchangeService($ExchangeVersion)
    $Creds = New-Object System.Net.NetworkCredential($ImpersonationCreds.UserName, $ImpersonationCreds.Password)  
    $RetentionPeriod = New-Object Microsoft.Exchange.WebServices.Data.ExtendedPropertyDefinition(0x301A,[Microsoft.Exchange.WebServices.Data.MapiPropertyType]::Integer);                   
    $RetentionFlags = New-Object Microsoft.Exchange.WebServices.Data.ExtendedPropertyDefinition(0x301D,[Microsoft.Exchange.WebServices.Data.MapiPropertyType]::Integer);
    $PolicyTag = New-Object Microsoft.Exchange.WebServices.Data.ExtendedPropertyDefinition(0x3019,[Microsoft.Exchange.WebServices.Data.MapiPropertyType]::Binary);
    foreach($TargetMailbox in $mailboxes)
    {
        write-output "----------Mailbox $Targetmailbox --------------------"
        $Guid = 'No Guid'
        $status = $null
        if(get-mailbox -identity $TargetMailbox -ErrorAction Ignore) 
        {
            $Service.Credentials = $Creds

        if ($AutoD -eq $True) {
            $Service.AutodiscoverUrl($TargetMailbox,{$True})  
            "EWS URI = " + $Service.url
        }
        else {
            $Uri=[system.URI] $EwsUri
            $Service.Url = $uri
        }

        $Service.ImpersonatedUserId = New-Object Microsoft.Exchange.WebServices.Data.ImpersonatedUserId([Microsoft.Exchange.WebServices.Data.ConnectingIdType]::SmtpAddress, $TargetMailbox)
        $FolderId= New-Object Microsoft.Exchange.WebServices.Data.FolderId([Microsoft.Exchange.WebServices.Data.WellKnownFolderName]::MsgFolderRoot,$TargetMailbox)   
        $EWSParentFolder = [Microsoft.Exchange.WebServices.Data.Folder]::Bind($Service,$FolderId)
        $FolderView = New-Object Microsoft.Exchange.WebServices.Data.FolderView(1)  
        $SearchFilter = New-Object Microsoft.Exchange.WebServices.Data.SearchFilter+IsEqualTo([Microsoft.Exchange.WebServices.Data.FolderSchema]::DisplayName,$FolderName)  
        $FindFolderResults = Get-MailBoxfolders -service $service -targetmailbox $targetmailbox -folder2find $FolderName

      if($FindFolderResults) #foldercount if
      {
          $folderresults= @()
          foreach ($folderfound in $FindFolderResults) #foreach
          {
            $Tag = ($Service.GetUserRetentionPolicyTags().RetentionPolicyTags | where {$_.DisplayName -eq $RetentionTag})
            [Microsoft.Exchange.WebServices.Data.FolderId]$folderid = $folderfound.Folderid        
            $ofolder = [Microsoft.Exchange.WebServices.Data.Folder]::Bind($Service, $FolderId) 
            write-verbose "setting the retention flag"
            $ofolder.SetExtendedProperty($RetentionFlags,129)                                                                                                                                        
   
            write-verbose "Set  the value of the retention equal to the value  from our tag retention period"                                                                                                                                                                 
            $ofolder.SetExtendedProperty($RetentionPeriod, $tag.RetentionPeriod)                                                                                                                     
            write-output "set the exended property policy tag name $($tag.DisplayName) using it's guid $($tag.RetentionId)"
            $oFolder.SetExtendedProperty($policytag, ($Tag.RetentionId).ToByteArray())                                                                                                               
            try
            {
              $ofolder.Update()  
              $status = 'updated'  
              $Guid = $tag.RetentionId
            }
            Catch [System.Exception]
            {
              $status = "$('Error Output was' + ($Error[0] | Select-Object *))"
              write-verbose ('Error Output was' + ($Error[0] | Select-Object *))					
            }   
            $folderresults += [pscustomobject] @{
              'foldername'= $folderfound.name 
              'folderGUID' = $folderfound.folderid
              'ParentFolder' = $folderfound.parentfolderName
              'status' = $status}
          } #end foreach
        } #end folder count if
      else  #else folder count
      {  
          $status = 'No Folder'
      }  #end else folder count
          
          
    $return = [PSCustomObject]@{
      'mailboxName' = $TargetMailbox
      'Guid' = $Guid 
      'folders' = "$($folderresults.foldername -join ',')"
      'folderGUID' = "$($folderresults.folderguid -join ',')"
      'ParentFolder'= "$($folderresults.parentfolder -join ',')"
      'Status' = "$($folderresults.status -join ',')"
    }
        $returnStatus += $return
        Write-Output '___________________________________'
    }#foreach

    
   } #end get identiy mailbox

       if($returnStatus)
    {
        $returnStatus | out-file -FilePath $logfile -Append
    }
}
else{
    write-error "Cannot Find File $targetmailboxes or cannot the Get-mailbox command is unavailable" #test target mailbox if
}

get-pssession | Remove-PSSession  

I am running the script against an Exchange 2016 server. I had to change the line 169
$ofolder.SetExtendedProperty($RetentionFlags,129)
to
$ofolder.SetExtendedProperty($RetentionFlags,137)
so that the policy was set cleanly