Having templates appear when users click the "New Document" button in a document library with custom content types

Hi all,
I'm using SharePoint Online, but I'm seeing the same behavior in an on-prem 2013 instance as well. My situation is this:
- I've created a document library
- I've created a custom content type and attached a custom document template to it
- I've assigned the custom content type to the document library, and disabled the default "document" option
What I'm expecting to see is that when I browse to the document library and click "new document", that either a) a picklist appears allowing me to specify the document template I want (using the custom template I specified) or b) open the custom
template itself. That doesn't happen - instead, when I click new document I'm prompted to upload a file, which seems to contradict the whole point of using a custom content type/custom document template combo.
Am I missing something? The custom template isn't in the Forms library, which seems to be a problem if I wanted to use the custom document template instead of the default.
Ideally I'd like a menu like the one shown here:
http://social.msdn.microsoft.com/Forums/en-US/59ce3bd8-bf7f-4872-ae76-60d8c81dfc32/display-content-types-on-new-document-button-in-document-libraries?forum=sharepointgeneral, except with me being able to control the list of items that is shown.
Any ideas? Thanks!

Hi Brain,
What you have done is by design behavior.
If you want to show the Office document templates list (e.g. below image from your above referenced link) to select when click "+new document" link, this will need to install Office Web App 2013 which provides this feature,
you can new document and see it is using WopiFrame.aspx page, please see more from below article about how to configure OWA 2013 for SharePoint 2013 on-premise.
http://technet.microsoft.com/en-us/library/ff431687(v=office.15).aspx
Thanks,
Daniel Yang
Forum Support
Please remember to mark the replies as answers if they help and unmark them if they provide no help. If you have feedback for TechNet Subscriber Support, contact [email protected] 
Daniel Yang
TechNet Community Support

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