As this league tries to build itself into an ongoing concern, I don't think it's a disaster to include more teams in the playoffs. From what I've seen in some of the forum posts, it can be hard even with the current format to get people to play their games in a timely fashion. The more people are essentially eliminated from playoff contention, the harder it may be to get them to complete their schedule.
My fantasy football league used to include 60-80% of the teams in the playoffs to keep everyone interested, and as the league matured and we developed a stable, dedicated membership, we cut that number back to about 40% and it worked pretty well.
A smaller playoffs would be good in the long run, I just don't think it's a disaster to keep it at 16 teams for now.