The retractor is an item found in the Asylum that is always heavily guarded by the sniper guard hookmen and is always held in a shrine. It is sitting on an altar that looks like a golden statue shaped like a human and the Retractor is sitting where the statues ribs would be. There are three Retractors to be found in the Asylum in various hidden places.
Their purpose is to open the way through the last three remaining serial killers that didn't have a Retractor already placed on them. The five that are sealed are Avery Marx, Victor Batrachian and Jack the Ripper, their corpses can all be found in the Asylum Cathedral of Pain. Shadow Man needs to find each specific corpse wile holding the Retractor and press the action button to mount it, then the action button again to pass through the corpse into Liveside. Although you can pass through the corpses and come out on the other side as Mike LeRoi you still can't defeat the five without the ShadowGun. Shadow Man will also have to acquire all three pieces of L'Eclipser to bring the night into Lifeside to defeat all of the five.