Yes you need to cover the knives. Blade guards like these are the most commonly used for this type of thing http://www.chefknivestogo.com/knifeguard412.html
but some guys use a variety of covers.
You can even make some out of cardboard and duct tape if you don't have access to these guards.
After you cover the blades you want to stick the handles in the pockets to keep them secure. If you put the knives in unprotected there are several bad things that can happen:
Your edges clang around and get beat up.
Your knives cut up the bag
You stab through the bag and kill someone inadvertently. (kidding but it could conceivably happen)